Well, I don't know about any paper currency with gold threaded into the bills, but I'm rather doubtful that this could amount to much. Gold and Silver coins with a certified amount of precious metal in them were the only type of commodity currency ever widely used.
There are three types of currencies:
1. Commodity currency, which more or less means precious metal coins. This type of currency IS it's own "reserve". It is intrinsically valuable, although its' use as a currency can radically change the value of the metal out of which the coins are made. i.e. if silver is suddenly adopted as the precious metal to be used in a newly formed nations currency (such as the US, for example), the value of silver per ounce is likely to rise.
However, the main point is that the money will never become completely worthless. Even when if a country or countries were to go to a gold standard, and thus remove the monetary status of the coin, it would still be valuable for use in silverware (hence the name) or jewelry.
Also, the other important point about a commodity currency is that it cannot be created out of thin air. It can be introduced in a number of ways, for example, by having what is known as a "free mint" where if you bring raw silver, the mint will determine its purity and the actual amount, and give you silver coins in exchange for the silver bullion.
This allows for the natural expansion of the money supply, to an extent. If the economy is expanding and a silver dollar starts to buy more and more goods and services, then the mining of silver will become more and more profitable, and thus more silver will be pulled from the ground and brought to the mint, which will naturally offset the deflation process.
And there is more to say on commodity currencies, but that's enough for now. Suffice it to say that while there are practical difficulties in its use, the main benefit far outweighs them, which is that it prevents governments or banks from creating money out of thin air.
2. A fiduciary currency. This is a currency which stands for a precise amount of precious metal or other commodity (almost always precious metal). It say right on it how much and what kind of commodity it represents. And the idea is that you can take it to a certain institution at any time, for any reason, and get one ounce of silver, for example.
The bill takes the place of a bulky coin or coins, and thus is more practical than a coin in that way. In some cases this certificate type of money first started out as certificates issued by individual banks, to keep track of a depositors stash of gold or silver, but people started just directly trading the certificates, and thus they became money for some local economies. And eventually this turns into a reserve currency, and there is talk of the "gold standard" and all the gold stored at Fort Knox, and so on.
The truly diabolical thing, however, is that it becomes very quickly apparent to the people who issue the certificates that the VAST MAJORITY of the gold or silver just sits in the vault. So, hey, why not print up more certificates than commodity? The bills are treated the same, at first, even though there is now only a fractional reserve and that the issuers of the money have defaulted somewhat on their fiduciary responsibility.
This creation of money from nothing causes inflation, and it always will. You can't cheat reality. Eventually SOMEONE has to pay the piper. But the crappy part is that it is NOT THE PERSON WHO COMMITTED THE FRAUD. That person (or entity) reaps the full value of the bills, because the economy has not yet made an adjustment for them. The little old lady who has saved her pennies and saved up her money--SHE and people like her are the ones who "pay" for that money, because the buying power of the paper bill goes down: it will purchase fewer goods and services.
The almost magical short term effects of creating money out of nothing inevitably cause the fractional reserve ratio to go below 1:10 or even 1:100, and soon, the switch is made to the last de-evolution of currency
3. Fiat currency. There is NOTHING "backing" this currency except the good faith of all the other people in the economy and the might and dominance of the government. When governments irresponsibly print up or "create" these notes (electronically, for example) rapid and catastrophic economic collapse follows. Witness Argentina.
But what happens--if the government and banks are smart--is that they create a "small" or "reasonable" amount of inflation, such as 5 percent per year, which may not sound like much but it means that a very large percentage of the value of the currency is lost in a ten year period--I can't remember how much off the top of my head.
And don't buy the rhetoric: inflation is not the natural result of an expanding economy. Quite the opposite.
But I've probably already said quite enough to start a flame war.
Anyway, the Dinar is the only currency left which is a true fiduciary currency, redeemable for and backed by gold.
However, the banks which created and which issue the Euro are required to have no less than 15 percent of their holdings in gold, so you could maybe say that the Euro is 15 percent backed by gold. Sort of. Execpt that there is no guarantee that you can go and get 15 percent of the value of the Euro as an equavalent economic quantity of gold. Plus it wouldn't do you any good anyway.
It stuns me to think how little people seem to grasp exactly what a trade imbalance means. When we hear that the US trade deficeit is 40 Billion USD per month, we should understand that this means that $40,000,000,000 every month is being held by foreign companies or other entities, in the belief that it is a "good place" to "put their money". But what if suddenly, it started to become apparent that it was NOT a good place to put your money? What then? All those dollars would come home to roost and there would be MASSIVE and almost overnight inflation, and the Fed wouldn't be able to just sell more bonds at low rates to soak up the extra money because no one would buy them. It would be an economic disaster of the first order.
And I don't see how it can be avoided; it's just a question of when. We certainly aren't changing our course or our policies.
Someday all of this currency we so unthinkingly take as valuable will be the same as Monopoly game money--worthless. We're not so special that we can cheat reality indefinitely without paying any kind of price for it.
