Gold is a physical, tangible asset you can put in your hand, and you can use it as a form of currency by paying for something - by putting it down on a shop counter and walking away with some good or service. The shopkeeper is paid.
National currencies, in contrast, are financial assets. They're not a tangible asset. They have no substance to them. They're a bookkeeping entry on the balance sheet of banks. And they're not an asset of the banks; they're a liability of the banks.
So a shopkeeper is not "paid" in the real meaning of that word until the currency received is spent on some tangible good or service. Until then, the shopkeeper has what is called "payment risk." If his bank becomes insolvent, he loses what he put in the bank, like what happened to bank depositors in Cyprus last year.
So when you take your dollars and deposit them in a bank, the bank has a liability to you to repay those dollars when you choose to spend them. But what you've done is you've given title to your dollars over to the banking system, and they can do with them whatever they want. They can lend those dollars to overleveraged mortgage brokers. They can lend those dollars to third-world countries.
And that's the basic problem that we're dealing with in the monetary system. It's a system that's called "fractional reserves." The banks don't really hold in reserve the dollars that they owe to their customers. And we saw the implications of what that meant in 2008 with Lehman Brothers. Before that, we saw it in 2007 with Northern Rock here in the U.K., where I live. It was a U.K. bank that went bankrupt and became insolvent.
We've seen this bank insolvency time and again throughout history. Back in the 1980s, a bank collapsed called Continental Illinois, which was one of the biggest banks in the U.S. Back in the 1970s, another big bank called Franklin National Bank collapsed. There have been dozens and dozens of bank collapses throughout history because of this fractional reserve system.
- James Turk via Seeking Alpha
