The Difference between Currency and Money
The Difference between Currency and Money
When I started to look into Gold and Silver investing as way of propping up my pension I thought I would go back to the beginning and try to understand the history of money. I hoped in vain at that time this research would help yield some invaluable insight into future economic cycles by understanding what had happened in the past. Early on in my research I surprised to find out that what I thought was money in my pocket and cash in my wallet was in fact only currency and that there are some fundamental differences between the two.
To my amazement there has been an epic battle fought between currency and money down through the vaults of time. You and I notice the side effects of this battle when we go to fill our cars up and the price has leaped by $10 per tank full, or when we visit the supermarket and the price of bread has increased. This battle takes place between gold and silver, and the currency that is supposed to represent the value of gold and silver. To the untrained eye currency should win but historically gold and silver always revalue themselves and thus always win.
In the past currency has been represented by a myriad of things such as beads, grains, spices, livestock, shells, and in more recent time's paper. But only two things have ever been money: gold and silver. My early misconception was that currency is money. But this is not the case. Currency is but a medium of exchange you use to purchase something of value it has no intrinsic value in and of itself. Think about that $10 note, the paper that it is printed on is not worth $10. Unlike currency, money on the other had has a specific value.
The golden rule is this: money is always a currency and can be used to purchase items of value. Money has value in and of itself. Currency is not always money as it invariably has no value.
In the past as societies started to flourish they had high value commodities such as gold and silver. In order the leverage their reserves early governments would issue paper demand notes (currency) that were originally redeemable against precious metals. The real money, the gold and silver, remained secure in vaults whilst the demand notes were issued as a form of receipts to the general populace. These governments would then typically expand the supply of currency through deficit spending and printing even more paper demand notes. Basically, the amount of currency in circulation could not be covered by the amount of real money in the vaults.
As invariably happens wars break out and economic crises occur. One of the many unfortunate symptoms of such events force runs on banks where people like you and I, try to withdraw our hard earned money from the banks. As there is more currency than money (gold and silver) governments suspend our redemption rights and thus create a fiat currency. This fiat currency is not backed by anything other than "good wishes".
Today governments such as the US Government have the ability to create currency at will without anything to back it up. Any currency that derives its value from an arbitrary decree or pronouncement from a government is a fiat currency and indeed all currencies in use today throughout the world are fiat currencies.
During economic upheavals such as those witnessed in recent years everything gets more valuable except currency. Your dollar and my dollar do not buy as much as they did two or three years ago. Precious metals such as gold and silver have on the other hand rocketed in value. Perhaps the age old battle rages on still and good old fashioned gold and silver will win out once again.
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