By Russell Robertson, CFP Rogue Waves
A Dollar Made of Sand
Ever look at that dollar in your pocket and wonder “What’s so special
about this piece of paper?” Remember when that bill used to say “Silver
Certificate” across the top instead of “Federal Reserve Note?” What about
“Gold Certificate?” If you answered yes to that last one, a very happy 90th
birthday to you, since those stopped being printed in 1933.
Well that’s the question for today: What’s the difference between sand
dollars and dollar dollars, and why is one investable and not the other? The
short answer is there aren’t enough sand dollars. The longer answer is...
Back in the day, money didn’t exist. Goods were exchanged via bartering.
The objects exchanged each had value individually, but it wasn’t a
standardized value. Perhaps an umbrella setup is worth a bottle of rum to
me, but to Russ down the street it’s only worth a bottle of sunscreen. What’s
the conversion rate between rum and sunscreen? Depends on how sunny it
is... you can see the issues with this system.
Eventually, there were certain goods considered valuable by everyone in
a society. Gold, sure, but also pepper and saffron (early Europe), wampum
(American colonists), giant immovable rai stones (certain Pacific Islanders),
or theoretically even sand dollars. Widespread acceptance as a store of
value made it a perfectly viable form of money. As the world became more
connected, money increasingly needed to be something recognized across
multiple societies as having value. Would anybody in Europe accept payment
in rai stones? Probably not. That’s why precious metal - coins - ultimately
became what we recognize today as money.
Then banks and governments started writing IOUs instead of paying people
in coins. Those IOUs were a piece of paper that represented ownership of
a certain amount of coins. Because the paper was issued by a bank that
everybody knew had a vault full of gold coins, it was accepted by society
as a suitable standard store of value. A gold standard, you could call it. So
instead of gold coins changing hands, these paper IOUs are being used as
money and exchanged for goods and services.
Now imagine someone - let’s call him “Richard Nixon” - comes along and
says, nah, you know what? This note isn’t redeemable for gold. It just is. That
newspaper you get for a one dollar bill? You can still get it for a one dollar bill.
You just can’t take that bill to a bank and redeem it for gold coins anymore.
Thus, the birth of cash. Money backed by nothing except a history of societal
convention and a belief in the trustworthiness of the issuing government.
It’s theoretically possible such “full faith and credit” could be called into
question, à la Weimar Republic Germany or present-day Zimbabwe and
Venezuela, at which point a black market sand dollar-based economy could
take hold on Tybee. But until then, stick to the dollar dollars.
Cash has an important role in an investment portfolio. In the short-term,
cash is the only way to reliably protect portfolio value. In the long-term, no,
it won’t keep up with inflation or get you a comfortable retirement - “under
the mattress” is not the best investment strategy. But the single biggest risk
with investing is not that you’ll lose everything; it’s that you’ll be forced to
sell when prices are down. Having an allocation to cash reduces that risk,
protects the value of a portion of your portfolio in the short-term, and gives
you the ability to take advantage of future investing opportunities that arise.
It may not be backed by anything these days, but cash is still king.
22 TYBEE BEACHCOMBER | AUG 2018