Difference between money and currency

The words ‘money’ and ‘currency’ are used synonymously to each other. However, there is a blurred difference between them, which many people don’t know. In simple words, money doesn’t lose its buying power, unlike currency. Money is a ‘store of value’, whereas currency is not. It is volatile, and can even go down to zero in extreme conditions. You can transfer money through online mode, but not the currency as it involves a hand-to-hand transfer to be traded and grow.

Let’s say a person who rears goats needs onions. He goes to the seller of onions and offers goat’s mutton to him for some onions. The seller gives the onions in exchange for meat. But let’s imagine a scenario where the seller is not interested in taking meat; instead, he is interested in fruits. What could that buyer do in such a case? Most probably he would find a  meat buyer who can give him fruits in return. Then he will go back to the onion seller and trade.

• Here come these questions in mind:
• How many times would the goat rearer trade to buy the required items? How much time would he have wasted in bartering just to buy onions?
• Were the fruits and goat’s mutton possess the same value?
• Was it a fair transaction?

Hence, the problem of ‘transferability’ (what to what) and ‘divisibility’ (how much) arose. Referring to the above example, it means what product should be exchanged for buying onions and if fruits are traded for onions then how many fruits should be given to buy a particular number of onions?

People of those times also contemplated these issues, and that’s how the advent of gold and silver coins happened. It took time to convert raw gold nuggets into coins, which later became a medium of exchange and solved the problem of transferability and divisibility in the barter system. However, the new challenges of theft and fungibility (replacing gold/silver coins with an identical item) incurred.

In the course of the time, nations emerged, and paper currency substituted the gold and silver coins. The paper currency used to issue as per gold reserves that a country possesses. Thus, it served as a “promissory note” for some decades. You can still see the statement on Indian currency bills that says “I promise to pay the bearer the sum of so and so rupees” signed by the Governor of RBI as a matter of assurance.

In earlier times, banknotes could be exchanged for the equivalent amount of gold. But, nowadays you cannot redeem the gold coins through  the promissory currency notes or coins, because for the following reason:

During World War II, the USA had come out from the Gold Standard System (the link between gold and banknotes) to fiat currency(money that is not convertible to gold or any other asset) to prevent the withdrawal of gold and its movement to other countries. Further, this move enabled the government to print more currency and used it for spending more. Since then, all countries started coming out of this system and currently, no country is using the Gold Standard System.

But, a new problem of excessive printing of money arose after coming out of the Gold Standard System. It led to inflation and in turn, reduced the value of the currency. Therefore, you cannot buy the same number of items with the same amount of currency as compared to previous years. On the other hand, gold and silver still hold their worth because of the spike in the value of currency required to buy it.

Bottomline

While recalling what we discussed above, money holds intrinsic value like gold. Even when the world financial markets become unpredictable, investors turn to gold as it is more secure. On the other side, the currency assumes its value by the printing order from the government or RBI.