When Robert Kiyosaki wrote his book, “Fake: How Lies Make the Poor and Middle Class Poorer,” he modified it to read, “Rich people don't work for fake money.” Apart from that, there are differences between money and currency.
To understand this modification, you should take a brief history lesson.
The World Will Change
Before knowing the difference between money and currency, Robert received a letter from his rich father saying, “President Nixon removed the dollar from the gold standard. Be careful, the world is about to change.”
At that time, he didn't fully understand what his rich dad meant, but he was interested. He read “The Wall Street Journal” looking for answers.
One of the articles that caught his attention was about gold. The price fluctuates from US$35 per ounce to US$40 to US$60 per ounce.
Thinking they were clever, Robert and a fellow pilot named Ted flew from their carrier across 25 nautical miles into enemy territory. They hope to find a gold dealer and get a good deal.
They tried to negotiate with an old woman in a small village, with an opening offer of US$40 per ounce. Unbeknownst to them, the market price was US$55.
The little woman they were bargaining with just pursed her lips and looked at the fools in front of her; smiling, he said, “Don't you know that the price of gold is the same all over the world?”
Luckily, they got out of there undetected by the enemy, but of course they didn't get a deal for the gold. Instead, they walk away with valuable lessons about real money.
The Difference Between Money and Currency and the Impact of Nixon's Decisions
In 1971, President Richard Nixon changed the money rules. That year, the US dollar ceased to be money and became currency. This is one of the most important changes in modern history, but few people understand why.
Before 1971, the US dollar was real money linked to gold and silver, which is why the US dollar was known as a silver certificate. After 1971, the US dollar became a Central Bank Note—a letter of promise from the US government.
Instead of our dollars becoming assets, they are converted into liabilities. Today, the United States is the largest borrowing country in history, partly because of these changes.
Taking a brief look at the history of modern money, it is easy to understand why the 1971 changes were so important.
After World War I, the German monetary system collapsed. While there are many reasons for this, one of them is that the German government was allowed to print money as it pleased. The resulting flood of money led to runaway inflation.
There are more marks, but they buy less and less. In 1913, a pair of shoes cost 13 marks. In 1923, that same pair of shoes was worth 32 trillion marks!
As inflation rises, the savings of the middle class are depleted. With their savings gone, the middle class demanded new leadership.
Adolf Hitler was elected Chancellor of Germany in 1933 and, as we know, World War II and the murder of millions of Jews followed.
New System of Money
The difference between money and currency was increasingly realized at the end of World War II, where the Bretton Woods system was implemented to stabilize world currencies. It is a semi-gold standard, meaning the currency is backed by gold.
This system worked well until the 1960s when the US began importing Volkswagen cars from Germany and Toyotas from Japan. Suddenly the US was importing more than exporting and gold was leaving our country.
To stop gold losses, President Nixon ended the Bretton Woods System in 1971 and the US dollar replaced gold as the world currency. Never in world history has one country's fiat currency become the world's money.
To better understand this, rich dad asked Robert to look up the following definition in a dictionary. “Fiat money: money (such as paper money) that cannot be converted into coins or other types of equivalent value.”
The words “cannot be converted into coins” confused Robert. So rich dad asked him to look up the word: “fiat.”
"Fiat: command or act of will which creates something without or as if without further effort."
While looking at rich dad, Robert asked, “Does this mean money can be created out of thin air?”
Nodding his head, rich dad said, “The Germans did it and now we do it. That's why savers are losers,” he added.
“I fought in France during World War II. That's why I never forget that after the middle class lost their savings, Hitler came to power. People do irrational things when they lose their money,” he said.
Most economists would disagree with rich dad's correlation between losing his savings and Hitler. Maybe not an accurate lesson, but still unforgettable.
Over the past year, we have experienced record inflation. At the end of September 2022, the inflation rate reached 8.2 percent in 12 months.
In 2021, inflation will reach 7.0 percent. Inflation hasn't been this big in more than 40 years. According to CNN, consumer prices for gasoline in June rose 59.9 percent, food rose 10.4 percent, and housing rose 5.6 percent. In short, the middle class feels it.
Despite facing these record price spikes, federal government economists for most of 2021 said that inflation was “transitory in nature,” meaning it would be temporary and would disappear.
They were dead wrong, and now the Fed is raising interest rates aggressively to try to control inflation.
However, they are struggling because there is so much fake money in the economy due to years of low interest rates and quantitative easing.