Money and Currency: Know the Difference
Author’s Note: For a brief time this year, I started blogging on a different website. It was a thought experiment, and I’m happy to say I’ve made some progress with it. Although the home of my literary career is up in the wind at the moment, I was able to reconnect some mental circuits and produce the type of piece I haven’t written in a while: a monetary exposition! While I do not have plans at the moment for The Rad Box, I will lift some of my work from there and place it at the foot of my once and perhaps future home: Radocracy.
What is money? Most of us know it as little pieces of green paper that we all work for, buy things with, and save for the future in. Sadly, most of us end our thoughts about money at that, and would rather focus on simply wishing we had more of it. Very little attention is paid to where it comes from, what the meaning behind it is, and why it has such an impact on our lives. There are those who damn it, those who love it, those who live for it, those who die by it, and those who see it as the ultimate tool to help them get to where they want to be. Let’s take a dive into the wild world of “money”, and see if we can learn a thing or two.
First of all, it is important to understand that there is money, and there is currency. They share much in the sense of definitions, but have two slight differences that make them worlds apart. Both money and currency are units of account, durable, fungible, serve as a medium of exchange, and act as a store of value. Some apply the term “scarce” as well, but we’ll get to that later.
Most modern day economists simply leave the definitions at that. Thanks to the economists (and also in large part to American colloquialisms) who have blurred the lines, most people use the terms money and currency interchangeably. If you go by the above definition, you would think there isn’t a problem with that. But there final few differences are as crucial as they are subtle.
Money, historically in the marketplace, has long been identified as something with intrinsic value. This means that absent any laws or geopolitical aberrations, your unit of account/medium of exchange/store of value still has value, no matter where, what, or who you are.
Currency, (while still defined as a unit of account, medium of exchange, and store of value whilst being fungible) has a history of operating without any form of intrinsic value, and instead relying on government laws and dictum to give perceived ‘value’. There may be laws that say taxes have to be paid in a certain medium, so that medium emerges as a dominant currency because market participants have to pay their taxes and nobody wants to face the consequences of not doing so. This can also be defined as “fiat” currency, or currency that derives its value from government legislation.
Here’s an easy way to visualize, and understand the difference. Imagine, in your pocket, you find $500 (USD). You’re probably pretty excited. You’re imagining all the fun things you could do with that money…but wait, that isn’t money. Oh sure, you don’t want to sound like a dork and call it currency, but that’s what it is. The USD (United States Dollar) is currency. You can spend it in the United States, but not so much anywhere else in the world (unless you found someone willing to accept it). Everyone in the United States, when they pay taxes, must do so in US dollars. You couldn’t go to Europe and pay taxes there in USD (or buy goods or services). Flip the scenario; imagine you find €500 (euro) in your other pocket. You’re still in the United States. What good does this do you? You don’t live in Europe, so you can’t use it. Stores in the United States won’t accept it, and US government would sooner throw you in a cage rather than accept Euros as tax payment. You could sell your Euros for dollars, and be on your way but you would still be stuck converting from currency to currency. Where you physically stand in the world affects the value of the paper in your pocket, and in many cases unless you are holding a preferred currency (such as the world reserve currency) you may find yourself without anyone willing to take your pieces of paper in exchange for THEIR pieces of paper.
Money, on the other hand, holds value no matter where you are. The curious case of money, relative to currency, is that under current market conditions money serves as the ultimate accessory to currency. The easiest demonstration of money is gold, or silver. In truth, it could be anything durable that has value in and of itself, but over the course of human history where markets have existed and exchange of goods and services occurs, the prevailing monetary instrument is gold or silver. Most industrialized nations on Earth do not accept gold or silver as a form of payment. This is because legal tender laws require merchants, businesses, and market participants to pay taxes, fees, and/or other dues in the emitted currency of their country. Imagine the scenario mentioned above where you’re stuck with the wrong currency in some random country, but cannot find anyone willing to take your paper currency from your home nation. Now, imagine in your back pocket, you find an ounce of gold and ten ounces of silver. Excellent! While the your paper currency may not fetch much (if anything) anywhere, these pieces of precious metal will surely find a buyer. Why is that? Because gold and silver are scare and valuable in and of themselves. They are durable, fungible, and represent a store of value. You’d find someone willing to trade you goods or services for these monetary instruments almost anywhere (assuming you haven’t somehow wandered into a nation that hasn’t yet become developed enough to take care of tertiary needs, such as consistent food production and water purification).
A new wrinkle in the money/currency dichotomy is the emergence of crypto-currency, such as Bitcoin. It may seem easy to categorize it as currency because of its origins name sake (cryto-currency) but it’s still important to know why. Bitcoin has no intrinsic value other than the artificial constructs surrounding it. That being said, it is a thoroughly decentralized currency system that despite its limits (internet and computer access is a prerequisite) it can operate quite well without borders, similar to precious metals. We’ll talk more about this at a later date, but the take away here is that money and currency are always evolving with the demands and needs of markets and their participants.
The money in your pocket has value across borders and time. Its value is derived from the marketplace and interpersonal exchange. The currency in your pocket has value in select or limited locations. Its value is derived from government legislation and dictum.
This isn’t to say markets can’t perform efficiently with currency; they certainly do. Markets have always performed and acted with money, and only resort to currency when the governing body encompasses the marketplace and draws its borders around the participants. Money becomes a “back-of-the-mind” thought, and takes to the economic underground where it waits while the cycle of currency runs its course. There is an incredible and terrifying risk of relying on currency for long periods of time, however. This risk emerges from the emitters of currency: the government, and the banks they charter.
To be continued…
Posted on September 3, 2014, in Life Economics and tagged banking, bitcoin, central banks, cryptocurrency, currency, economic value of money, Finance, gold, money, Silver, store of value, trade, what is currency, what is money?. Bookmark the permalink. Leave a comment.