Defining Money and Currency
From the viewpoint of our current economic system.
Previously, we have seen that self-interest and collective-interest are the driving forces behind the free market. The purpose of the free market is to satisfy these interests and find a balance between the two. It’s now time to turn our attention to understanding money and currency. It is a good idea to have clear definitions of the terms involved, so this article will be dedicated to explaining these terms. In this article, I want to give you a clear idea of what money and currency are in the purchasing paradigm, because that is the viewpoint from which our current economy operates.
Money
The first thing we need to define is money. The generally accepted definition of money is that it is a medium of exchange for goods and services. I find this definition very vague. In fact, it could be applied to money in either purchasing or bartering paradigm because of its imprecision. Goods and services can also be exchanged without money so the term medium of exchange does not really explain the purpose of money. Another definition is that money is something that is accepted as payment for goods and services, and for the settlement of debts. This is a better definition, as it defines money as a means of payment. This definition is based on the idea that the exchange of goods or services for money is the basic interaction in the economy. That is consistent with the viewpoint of the purchasing paradigm, so this is a good definition of money as we have it in our current economy. Note that payment can be made with something that is not money, for example in a barter exchange. What makes something money is that its recipient in the exchange does not want it for its use-value, but rather as a store of wealth which can be used to purchase another item in the future. Thus money in the purchasing paradigm is assumed to have some value, whether it be intrinsic, as in commodity money, or presumptive, as in the currencies we use today. I have already shown that money that arises in the bartering paradigm is different from that in the purchasing paradigm. In my next article, I will define money from the point of view of the bartering paradigm, which is what I hope our economy will move towards.
Currency
Currency is the second thing we need to define. The definition of currency is simple. Currency is a system of money that is widely accepted. Note that this is true regardless of the definition of money. All currency is money but not all money is currency. There are different ways that money can become a currency. If the money has intrinsic value, such as gold or silver, people may choose to accept it as payment for goods and services they provide, because they trust in its ability to hold its value, and in the worst case they can find a use for it. Other kinds of money, of no intrinsic value, can become currency based on the trustworthiness of the currency issuer. The currency issuer may promise that the currency can be redeemed for some goods or services he or someone else provides. Finally, money may become currency by fiat. This is the kind of currency that is generally used in the world today.
Fiat Currency
To properly define fiat currency, we first need to define the word fiat. Fiat is defined as a formal authorisation by a person or authority, in other words, a decree. Thus I define a fiat currency as any kind of money that is widely accepted because there is an edict that requires it. Notice that this definition is slightly different from the usual definition of fiat currency. The standard definition includes an additional requirement that the currency have no intrinsic value. I do not think this addendum should be part of the definition, as the word fiat has nothing to do with intrinsic value. Therefore I will refer to the current fiat currency system that the world uses as an unbacked fiat currency because it is not backed by anything of intrinsic value. Of course, it is backed by the government that issues it, but the promise of a government is not something with intrinsic value. Note that with my definitions there is no such thing as fiat money, only fiat currency.
You are probably thinking now that if fiat currency may have intrinsic value, what does that say about the gold standard currency system we used to have. The gold standard currency system is a fiat currency, given my definition. I’m sure some people will disagree with me but I think it is the correct way of looking at currencies. I agree with proponents of the Austrian School that gold is money. The question here is whether gold is a currency or not. In the olden days, for a large number of people, gold in the form of coins was currency. But not everyone likes gold as a currency. Some prefer silver, and some even prefer salt. For gold to become a national currency, e.g., the gold standard, the government has to pass a law to make it legal tender. This, by definition, makes it a fiat currency. My view is that gold is money, but a gold standard is a fiat currency. That is why it is so easy for it to degenerate into an unbacked fiat currency system.
The main problem with fiat currency is that it limits currency creation to a subset of society while requiring the remainder of society to use that currency. Even if other currencies are allowed to operate in the economy, members of the public are still required to settle their taxes using that fiat currency. This forces everyone to use the fiat currency, and makes it difficult for other currencies to compete with it, resulting in a currency monopoly. Currency monopoly, like any other monopoly, even one held by the government, is not a good thing. Limiting currency creation to a subset of people also means that the remainder of society is constantly indebted to the currency creators. This results in a wealth transfer from the remainder of society to the currency creators.
Money and currency in our economy evolved from commodity money to the unbacked fiat currency system we have now. Even though we no longer use commodity money, the infrastructure in place for creating and injecting money into the economy, as well as policies enacted by the government, are based on the viewpoint of the purchasing paradigm. Thus everything is set up as if our economy still uses commodity money. We can, and should move away from that paradigm. In my next article, we will see what money is in the bartering paradigm.
