Money and Currencies

When we talk about money the most important thing is to understand the difference between money and currencies.

Money is a medium of exchange and a store value for future use. In order to be considered money and a store value it must be scarse and homogeneous so that it can be divided in small amount of identical sizes, quality and exchange value.

The value of money should only be linked to production and demand. Any commodity which is scarce will require a large expenditure of time or energy to locate and produce it. If the exchange value of money were to fall, those involved in its production should consider producing something else. The level of production would then decrease. It would fall until the demand sufficiently exceeded the supply, and then its exchange value would begin to rise. This rise would encourage more producers, and, as the supply increased, its exchange value would once again begin to fall. Over the course of time its level of exchange value would tend to fluctuate less and less, eventually leading to price stability. It is important to note here that the control of the supply of the commodity used as money is the willingness of people to expend their energy producing it.

This is the main reason why Gold and Silver are considered money since the 1500BC.

A currency is a legal tender issued by a state that is recognised by the state as a medium of exchange of value. These legal tenders are typically printed and managed by central banks. Currencies are not money cause they are not scarce (unless tightly linked to real money) and states and politician can easily produce them in high quantity.

Use of legal tenders as means of exchange of value is much easier than gold and silver hence in time they were more and more used as standard medium of exchange instead of Gold and Silver. In some cases they are linked to Gold or Silver, sometimes not but this is going to be a subject of another post.