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.
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