Are We Talking Money or Currency?
Medium with or without motion
So we've all been in those economic debates where “money” and “currency” get tossed around like they're the same thing. They're related, sure, but just like all cars are vehicles, not all vehicles are cars. You wouldn't call a bicycle a car.
Similarly, while all currency is money (though not necessarily good money), not all money can be currency sustainably. It's important we get on the same page here, so our spirited discussions about economics can be, well, a bit more informed and a lot less like ships passing in the night.
But before…
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Money
Remember those early communities where people agreed upon certain mediums to facilitate the exchange of valuable resources as counterparts with one another as their primary function. Various expressions of “money” circulated within the same community for different purposes. That’s essentially how money was born—and with it, the foundations of monetary economies.
Money can technically be any asset, but just because anything can be money doesn’t mean all assets are equally good at being money. Over time, communities trading commodities and credits tied to them started preferring some over others and thought, “Hey, hauling around all this stuff is a hassle. What if we had something shinier, something sufficiently scarce and precious that we all really like, easier to divide and move around, and durable enough to last?” They began favoring commodities like precious metals—gold, silver, copper—for that reason. What set these apart was their properties, mainly that mining them wasn’t easy or abundant, keeping their supply roughly in line with demand, stabilizing their exchange ratio with goods and services. This made them a more reliable store of purchasing power over time, unlike assets that spoiled or depreciated that value over time.
That’s why we took those metals to the next level—minting them into standardized coins with uniform shapes and quantities, making them way more convenient for community usage. In fact, since the first Roman coins were minted next to the Temple of Juno Moneta on Capitoline Hill around the 3rd century BC, the term “money” comes from the latin moneta, an epithet for the Roman goddess Juno, the protector of funds. So next time you drop some trivia at a party, you're welcome.
By standardizing these common representation units (commodity amounts, coins, later paper money, or today’s digital bits?), societies could more effectively measure and denominate exchanges using those mediums as common units of account.
So, as you see, while many commodities emerged as mediums of exchange, the ones that held their value over time survived best. That’s why some forms of money are simply better than others, and why monetary history gave us a convergence process to sort it all out. In the end, it’s all about a natural selection process favoring assets with the best properties and dynamics to serve their money functions.
Now, you might have heard the term “sound money” thrown around, especially in crypto circles. What does that even mean? Legend has it that back in the day, people would test minted coins by their “ring”—the sound they made—to check if they were pure gold or silver, or if someone had sneakily mixed in lesser metals. A clear ring meant the coin was legit.
But, like all legends, it remains just a legend. The reality of measuring purity was quite different. So, “sound money” refers to forms of money that best fulfill the described core functions of money, combined with the qualities civilizations have collectively settled on after, oh, a few millennia of trial and error. In essence, it’s about representations of money that possess varying degrees of “moneyness” (yes, that’s officially a cool term now).
Technological evolution has also played a crucial role in refining what makes money effective. In the quest to reach that ideal representation and through technological advances, we've landed on a few key properties:
Scarce. If money grows on trees—or can be printed endlessly without economic balance—it loses value. Scarcity prevents devaluation through over-issuance. That's why we talk about “hard money”, which is hard to come by and hard to make more of.
Divisible. You should be able to break money down into smaller units. It's hard to buy a loaf of bread if the smallest unit of currency is a gold bar.
Portable. Easy to carry around. A password to your account? Sure. Gold coins? Okay, but they’re heavier and easier to confiscate. Giant stone wheels? Even worse. Looking at you, ancient Yap islanders.
Fungible. Every unit is the same as every other unit. One dollar is the same as any other dollar, no matter its form or who issues it. Hmm, does that always apply?
Durable. It doesn’t fall apart over time—or at least not disintegrate in your pocket. Paper beats bananas, gold beats paper, but bits on synchronized computers beat gold?
Counterfeit resistant. Easy to verify authenticity, hard to fake. The more elaborate the security features, the better.
Immutable and censorship resistant. You control it without interference. No one can confiscate it or alter transactions without your consent.
But, as we covered in Money (I), money ultimately boils down to collective trust and acceptance. It’s a social construct, a shared symbol the community agrees on to enable the language of exchange. Without trust, it’s just shiny metal, a piece of paper, or digital bits on a computer. But history shows that people consistently gravitate toward forms of money that best fulfill its functions and excel in its core properties—trial, error, and a little “Monetary Darwinism” at work.
Currency
Now, “Currency” is like money's more active sibling. The term comes from the Latin ‘currens’, meaning “running” or “flowing”. In other words, it’s money in motion. It’s the monetary representation, whatever form it takes, that circulates as the medium of exchange in an economy. It could be the ‘commodity’ itself (physical, like minted coins, or digital), a claim on that commodity like ‘representative currency’ (think paper cash or its digital equivalent), or a fiduciary medium1 issued purely on trust, with no promise of redemption tied to any backing, like in ‘fiat currency’ systems.
While money could be anything, better or worse, like those gold bars stashed in your basement for a rainy day, currency is what's in your wallet—or, more likely these days, what's on your smartphone screen ready to be accepted in exchange for stuff.
Currency moves through an economy via payments—transferring the ownership of assets, money in exchange for anything valued in its denomination. What gives currency its purchasing power is its role as a direct, mutually accepted medium of exchange for economic value, whether it's goods like your weekly groceries, capital goods like your work laptop, or services like your child’s school tuition. Both the buyer and seller agree that this commodity, piece of paper, or digital record holds value, allowing the transaction to happen smoothly. Paying with a bond, futures contract, or casino chips? That’s not purchasing power—that’s just an intermediary instrument, financial or not, with market exchange value. Or in other words, indirect purchasing power used to reach the real goal: direct currency purchasing power, which serves as the common medium of exchange.
Therefore, for a currency to have self-sovereign purchasing power—meaning its operation and the stuff it can buy are independent of any other currency or asset—it needs to be used in transactions where both parties agree on its value without needing to convert it first into another currency. If you have a rare collectible coin that's not generally accepted at face value and you need to sell or convert it for regular cash/ currency before buying your coffee, it's more of a means of payment than a true currency.
This means currency is a subset of any money—specifically, the medium that's actively exchanged and circulated to keep the economic wheels turning. If a monetary asset's supply or any of its representative tokens discourage circulation, it hinders its ability to function as currency. It's like having a rare comic book; sure, it might be valuable, but you can’t exactly use it to buy groceries because, well, not many people are going to trade comics for food.
That’s why commodities like gold, or the digital commodity bitcoin, while scarce and valuable in the market, aren’t always effective as currency. People tend to hoard them—HODL, as it's commonly referred to—betting that their market price or foreign exchange value will increase over time due to limited availability and rising demand. But that same unpredictable reaction to a "hold it" move driven by incentives is exactly what keeps it from circulating. You can’t run an economy efficiently if gold directly were the currency and everyone just sat on it, waiting for the price to go up—something history has repeatedly shown.
So, circulating within an economic community is what gives money its direct purchasing power and allows it to serve as currency. It's the engine behind the exchange of goods and services, fueling economic activity that generates income, which is what truly gives money its value. Money tucked away under a mattress doesn’t do much for anyone’s wealth—except maybe for the mattress company.
The interplay and the importance of local trust
So, really, money or currency can be anything we want, as long as two parties agree to exchange it. But that’s a far cry from being a sustainable representation of value that leads to economic stability in a community. On the other hand, having all the properties of sound money is great, but it doesn’t guarantee that the money will function well as currency. For a currency to work effectively in a sustainable way, it also needs buying power stability and widespread trust in the community. In other words, having the right qualities is necessary, but it's not enough for a currency to actually do its job and circulate properly.
In future installments (stay tuned!), we’ll dive into why money—being a complex adaptive socio-economic system (buzzwords, I know)—needs a flexible supply to adapt locally and function as a sustainable currency. Flexibility is crucial for balancing purchasing power over time within the community economy where it’s used. For a currency to gain everyday adoption, it has to earn trust through social consensus, and the most reliable ones need to be supported by stable monetary policies that can adjust to the local economic context. We’ll break down these principles so you can understand them critically.
Currency system
You can have a monetarily attractive asset, but if it relies on another commonly accepted one to circulate, it’s not currency. The endgame? An asset that drives exchange without stalling circulation and still works as good money, either directly or when backed by it. And for that, you need a solid currency system.
But, what’s a currency system then? It’s the overarching framework where money does its job with the three functions, embodying the properties of sound money and enabling its circulation through instruments or tokens. Again, these tokens can be the monetary asset itself, directly—like unbacked commodities, gold, bitcoin (but are they really sustainable currency?)—or indirect representations of underlying money, like those old paper bills that used to be backed by gold (ah, the good old days) or today’s digital tokens.
Currency systems turn money into usable forms, whether physical or digital, and need a regulatory framework to function (and remember, regulation doesn’t always mean discretion as rules can also be automated and system-driven). This means having protocols for regulation or calibration, managing its distribution for both issuing and reducing currency, allowing for adaptation to different economic conditions. These systems can range from centralized models—hello, Federal Reserve—to decentralized networks like those built on distributed ledgers (aka blockchains), operating autonomously on predefined rules.
Thus, monetary policy framework and distribution mechanics play pivotal roles in preserving value, facilitating transactions, and fostering sustainable economic growth. The system's success hinges on its ability to adapt to unique community's circumstances without causing economic upheaval. It's a delicate balancing act—too much rigidity or too much flexibility can both lead to problems.
Wrapping it up
Understanding these distinctions lays the groundwork for a more critical view of different currency systems. It's crucial for grasping the broader economic environment and anticipating potential impacts. Remember, the effectiveness of a currency system depends on more than just the token representing the currency. It depends heavily on the stability, predictability, and trustworthiness of its two types of value: its internal purchasing power within the economy and its exchange rate stability with other currencies—its foreign exchange value that connects it to other economies.
So next time you're in a debate about money and currency, you'll have more ammunition—and perhaps a clearer idea of why not all vehicles are cars, and not all money is currency.
Any fiduciary media refers to the medium of exchange or any money substitute not fully backed by an asset, tangible or digital, relying solely on trust in the issuer or system for its acceptance and value.