Money vs Currency: What’s in your wallet?

Money, in and of itself, is nothing. It’s just something that we invented in hopes of it being able to represent everything. Money is valuable because we all agree that we can use it as a medium of exchange for goods and services.

We often talk about the dollar bills in our wallets or the numbers in our online bank accounts and refer to these digits as “money”. But, where did those numbers on the screen come from? And how valuable is that paper that the Federal Reserve prints daily, without limit? How true is the statement: “I have x amount of money in my bank account”?

In most cases, you don’t have money in your account – you have currency.

Money vs. Currency

Linguistically, “money” & “currency” are synonyms but economically, they have one profound difference. Money is a medium of exchange that is durable, divisible, convenient, fungible & has an intrinsic store of value. Currency, on the other hand, shares all of these characteristics with one key exception: it is not scarce & hence, it is not intrinsically valuable.

Today’s prevalent fiat currencies of paper & coins, such as the US Dollar, Euro or Yuan, are not intrinsically valuable because new notes are being printed incessantly. The more currency there is in circulation, the more dollar bills are needed to buy the same thing in the future. This is inflation.

Your dollar is worth less and less every day & it will continue to be printed & devalued into oblivion, until the day that people simply lose faith in its value and stop using it. It’s happened before and it will happen again.

Fiat currencies have been continuously created & destroyed under the pressures of self-imposed inflation for about 1,000 years, while money such as gold & silver has endured for over 3,000 years because of its unmatched durability, divisibility, fungibility &, most importantly, scarcity. Because money is finite (scarce), it can effectively serve as a medium of exchange for the finite resources on Earth. In other words, money retains intrinsic value over time, while currency loses value over time until it becomes worthless.

Reality Check

Money, or rather, currency dominates most people’s lives – we work for it, we use it to buy material necessities & pleasures, we think about how to get more of it, we judge others by how much they are able to accumulate, we get a high off of spending or hoarding more of it, we choose our friends based on it, we use it to determine our home, etc., etc., etc. It’s no wonder people are under the impression that currency is everything in life – it is, undoubtedly, a very important tool.

But currency is not everything. In fact, history has proved time and time again that, eventually, currency becomes just that: history. Money, on the other hand, is a much better way to hedge yourself in the long run. The internet era has ushered in new possibilities for the future of finance, not least of which is a new type of money that is the scarcest, most divisible, most transportable, most verifiable & most recognizable form of money in history: Cryptocurrency.

Although the vision of this decentralized & more inclusive financial future is exciting, it’s important to remember that money is a tool. We invent a tool so that we can use it, not so that it can use us. If you allow money to dominate your life, you’ll be miserable. On the contrary, if you allow yourself to dominate money, you’ll use it as needed & leave it for what it is: a means to an end, not an end in and of itself.

 

For more info about the difference between money & currency, this is a good video to check out: Mike Maloney’s Hidden Secrets of Money Series.

Image Credit: Erik Westerduin

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