What's the Difference Between Currency & Money?

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This is going to be a great post for those who are new to all this. I can remember back a decade or so when I first became interested in gold. I learned all there was to learn about how currencies rise and fall. And why. The real reasons why, not the fabricated reasons that revolve around this crisis or that. It's wildly interesting and if you'd care to learn more, I highly recommend reading The Creature from Jekyll Island by G. Edward Griffin. It's a thick book, but nothing you can't conquer.

Currency vs. Money​

Let me ask you something. One thousand years ago, do you think the United States Federal Reserve note that says $100 (a $100 bill) on it was worth anything? I hope you answered in the negative. Alas, the United States of America hadn't even been born yet. Here's another question for you. One thousand years ago, do you think one ounce of gold was worth anything? I hope you answered in the affirmative because gold has held value pretty much as long as anyone knows. Do you think a $100 bill from one hundred years ago was worth the same thing as $100 today? The answer is no. The $100 from one hundred years ago bought a heck of a lot more than $100 does today. I remember walking down to the corner store when I was a kid and buying a pack of gum for twenty five cents. That same pack is at least a dollar now. I remember when a gallon of milk cost $1.14. When a postage stamp cost fifteen cents. When a new car cost $7,000. When a dozen eggs cost fifty cents. What happened between the times when all of these things cost much less than they do now and today? Well, the U.S. dollar has devalued, for one. If you aren't familiar with the term in regards to currency, devalue means to lose value. To be eaten away. To not be worth what it used to be worth.

Did you notice how I used the term currency in the previous paragraph? What is currency, anyway? And how does currency differ from money? I'll keep things simple and explain the concept like this: currency holds no intrinsic value. Paper money around the world is considered currency. The number you see in your bank account is comprised of currency. If the government that issued a certain currency happened to fail, there's a good chance a whole bunch of people would be sitting there with valueless paper in their grips. It's happened before. Don't doubt that it won't happen again. Ask yourself this question when trying to determine whether what you have in your hand is currency or money. If you were to dip your paper in bleach and have all design disappear, would that paper by worth anything? If the answer is no, the you've got currency. Conversely, if you were to deface a piece of gold so you couldn't tell from which nation it was minted, would that gold be worth anything? If the answer is yes (which it is), then you've got money.

Currency, by definition, is a medium of exchange. It doesn't do well when it sits still. It's an agreed upon vehicle for purchasing assets of value as well as a variety of other things. You can ask for a currency when selling something and offer currency when buying something. There's nothing inherently wrong with currency and I'm sure the world would be quite an awful place to live if there was no such thing. The fact remains though, currency in and of itself is valueless.

Money, by definition, holds a value unto itself. Yes, it's an agreed upon medium of exchange as well, but it's also worth something. I suppose you can make a pillow case out of dollar bills and that pillow case might hold some value, even if the currency didn't, but that's about it. Gold and silver are valuable elements. So are other precious metals. I'll admit that most of their value is derived from human nature. We as humans covet gold and yearn to acquire and hold it, but it's also used in industry and exchange around the world. Whether you hail from Norway or Brazil or Texas, it makes no matter. Your gold will be good in any of these places and it'll likely purchase you the same amount of assets.

Fiat Currency​

When it comes to fiat currency, you'll find that the word fiat has been added when an authoritative power has established a currency by decree. For instance, the U.S. dollar is a fiat currency. So is the Euro and the Yuan. These are currencies that have been deemed legal to use in certain situations. They've also been deemed to be worth a certain amount. An arbitrary amount, but an amount nonetheless.

Inflation & Deflation​

Let's talk about inflation and deflation for a moment. I can make this idea very simple for you. Let's say that there were only one million dollars on earth, among every single nation. All we as a collective people had to spend was one million dollars among all of us. Essentially, we'd have to split that amount of currency up and each of us would get a slice of the pie and we'd be able to purchase things with our little slice. That one million dollars would have to cover the costs of pretty much everything we wanted to buy, from someone's labor to a piece of land to a new car to a peach at the market.

Now let's say that a new car costs $100. I know this isn't accurate in accordance with my example above, but it's a nice easy number to work with. With $100, any one of us could wander into a car dealership and buy a car with that amount of currency. That's a very straightforward idea. Now, let's pretend that one day, we woke up to learn that someone of authority had printed an additional one million dollars and had sprinkled it throughout the world. Now there were two million dollars for all of us to share. The thing is, that two million dollars would be used to buy the same amount of things we could buy previously. What we could buy hadn't changed at all. The only thing that has changed is the amount of money each one of us held in our collective pockets to buy that stuff.

The question is, if you walked into the same car dealership and asked to buy the same car as before, how much do you think that car would cost? You got it - $200. It's simple math really. The additional currency didn't add any benefit to the economy. It actually added just the opposite. For those who held their little slice of what was previously available close to their hearts, they saw half of its value evaporate into thin air. That's the beauty of inflation. It's great for debt holders, but not so much for savers.

And just so you know, the exact opposite is true when it comes to deflation. When you deflate a currency, it becomes worth more, not less. So in cases like these, debt holders would lose while savers would win.

The Life Cycle of a Fiat Currency​

I'm sure you've heard or read of the many examples of new currencies being created and old ones dying off. This type of thing has been a part of life since the earth was born. Here's how it works. A bank (or government - I'll get to the relationship between the two later on) creates a new currency that's linked to an asset, such as gold or silver. It doesn't need to be gold or silver, but those two are easy to understand. The government says, "We've got one one hundred ounces of gold, therefore we'll issue one hundred paper dollars to put into circulation." The gold will be stored in vaults while the paper is circulated among the populace to use for commerce and trade. It's not a bad idea. Essentially, the paper currency is an IOU that indicates what it's worth. Back in the old days, if you held paper currency, you could visit a bank to redeem it for its worth in gold or silver. This was commonplace.

The problem with currencies that are backed by physical assets is that they didn't buy much. As humans, we always want more. Because of this, we've devised methods for severing the link between our currencies and whatever we had that was backing them. By doing so, we've been able to create more and more currency without anyone being the wiser. Creating currency has grown the economy and has led to a number of very positive developments. Many gold bugs are rabidly against debasing currencies (printing more money) because it goes against their arbitrary standard of purity. The evidence suggests though that the expansion of currencies has been quite beneficial in the 20th and 21st centuries.

Anyway, inevitably, what goes up must come down. Apparently there are natural laws of economics that can't be bent without eventually breaking. As a currency becomes less and less valuable, it loses the faith of those who use it. Eventually, the population will turn to something else they deem valuable and the currency will be lost forever, no matter how much of it they've got stuffed in their pockets.

Who Does Fiat Currency Benefit?​

This is a good question and to answer it, you need to know who's in charge. I'll give you a hint - it ain't you and me. Let's just say for now that it's a combination of big government, big banks, and big business. The people who manage all of these things are good friends and they've figured out ways to make things work for themselves. Really though, I don't want to seem ungrateful because by making things works well for themselves, they've also made things work well for us. We'd be nowhere without these people and deep down we all know it. But I digress.

If an economy has a specific amount of currency floating around it, all assets in that economy are worth the perceived value of that currency. If new currency is added to the economy, the assets change their value, but not immediately, and that's important to understand. When new currency is introduced into an economy, yes, values of assets change, but only after the effect of that currency is felt. By that time, those who the currency is released to have already purchased a whole bunch more stuff with tomorrow's money at yesterday's prices. Get it? Over time, and as currency is perpetually released into the various economies of the world, those who it's released to amass more and more wealth and become more and more powerful. This is part of the reason certain groups love national debt. They make a killing off of it, until, of course, the entire house of cards falls down. Eventually, all of that new currency erodes the value of the old and parts of the average Joe's savings are confiscated. It's almost as if the average Joe has been taxed without even knowing it. Now there's a concept!

How Does Precious Metal React?​

The world can get away with expanding currencies for a while. On average, it used to be that any strong currency would last around 100 years until its malfeasance caught up with it. Today, it's lasting a bit longer. I don't know why that is. Most likely because bankers and governments have become more clever in some way or another. Eventually though, the population that uses the currency smells the awful stench of instability and rushes towards something else that they perceive as value. Oftentimes, that something else is gold and silver. This fiat stench and precious metal cycle has been going on for thousands of years. As the rush to precious metals is occurring, you can only imagine what happens to the price of it. What was once priced at $100 an ounce shoots up to $1,000 an ounce. This only makes sense as everyone all of the sudden wants it. Simple supply and demand.

During this transition to precious metals from a failing currency, there are only a few things that can be done. One, the entity in charge can decide to once again back the currency with something of true value, such as gold and silver or they can allow the currency to be completely destroyed and lose value. And in doing so, anyone who holds it will also have their wealth destroyed. It's not a pretty picture, unless you're the one who noticed what was going on and decided to trade in some of your fiat currency for precious metal. Or real estate. Or food. Or anything else that's actually worth something.

Well, I think I'll stop there for today. Tomorrow, I'll be writing a lot more and continuing this conversation about gold and silver. It's all very exciting to me, so if you've got any questions, please ask down below. I'd love to help answer them.

This post is part of a series: Guide to Investing in Gold & Silver by Michael Maloney
 
What's the Difference Between Currency & Money? was posted on 06-03-2021 by CaptainDan in the Economics Forum forum.
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