What’s the Difference between Money and Currency?

Money & currencies – Comparisons and definitions

This article will take a look at the definition of money and currencies. Many people see these two words as the same, but there is in fact a difference. This article will compare these two words and also highlight known problems that exist today.

Definition money

Money is generally a widely recognized & accepted medium of exchange and payment. I’ll spare you the complete history of money at this point, because I think most people know about the rough development of why our money is the way it is today. At first, money was simply just commodities, later it was mainly Gold for quite some time until the first variations of cash were born. These early types of cash were backed by something, mostly Gold, but this time is also long gone now. Money can’t be created out of anything, there are certain criterias that must be met. Money is simply not just money, because it has to fulfill the following basic functions:

Unit of account function

Since money is used for calculation, one unit is required. There is an equal and common standard for evaluating the goods being exchanged.

Store of value function

Money is always kept as value so that it can be exchanged for other values such as real estate. It should also be the task of money to always be able to keep the same value.

Medium of exchange function

…to pay for goods & services.

The difference between money and currencies – The definition of a currency

In order that the functions of money just listed can be carried out, different groups of people or countries form their own variant of money, a currency. The difference between both? Money has an actual fixed value, while currency only represents it. This means that the value of a currency can change over time. Authorities within a state make it their task to keep this as constant as possible. The best-known currencies are so-called fiat currencies, such as the euro (€), the US dollar ($) or the pound sterling (£).

To make the comparison and definition short: a currency is the form & execution of money.

The problems with today’s money & currencies

In today’s age, money (or currencies) are mostly transferred online (or digitally). Either through a banking service, third party services like PayPal or decentralized via cryptocurrencies. Cryptocurrencies also fulfill all functions of money, especially the store of value function. There is a big problem with FIAT currencies and so-called „bank money“ (also often referred to as „book money“). Book money is, as a claim for cash, a means of payment that can be used in banking by transferring from checking account to checking account using postings. As an economic aggregate, it is compared to cash. The problem is whether money is physically created or its only numbers on the screen: It can be created out of thin air. Since the gold standard has been lifted, people are losing more and more trust in this form of money. Some actually started working on a digital solution.

Since the 1980s, people tried to create a digital & legit online currency, ​​but no one could develop a working one. The biggest problem was by far the so-called „Double Spending“: This is the term for the problem of being able to spend a currency twice by simply copying & resending amounts. Imagine you had sent money with a friend via another decentralized network before the birth of bitcoin. He would have sent you 75 coins, so far so good. But you would not be able to be sure at this moment whether they were not simply copied beforehand. So there was the general problem that there was no value in decentralized money, which, as we know, means that money cannot gain trust and is therefore impossible to function as such. This all changed with bitcoin and the blockchain technology.

Today, currencies can be sent worldwide without having to worry about inflation or high transaction costs. Cryptocurrencies could be the final stage in the development of currencies.

What happens when money (or currencies) as we know it becomes worthless?

If inflation gets completely out of control and money (currencies) becomes worthless, the whole money evolution ironically gets back in time. In such cases, things that provide the most value are treated as currency. Could be anything: Bread, butter, tobacco, salt, alcohol…. People start to trade goods again like the early days.

There are actually a lot of examples in (recent) history, like Germany in 1923. Germany’s economy was completely destroyed, the state was bankrupt. In order to nevertheless meet the countries payment obligations, the printing press was fired up until it ran hot: As a result, inflation in Germany exploded. Sadly, printing money of course is still a common thing today. But it was nothing like what Germany experienced after WW1. Money became more and more useless by the day. People who received their wage immediately spent it all, on basically anything that was of use for their daily life. If someone saved up his money until the next paycheck came in, he or she was literally penniless by then. Actually, it was hard to find people who accepted cash at that time, since everybody knew how bad it was. Therefore, people began to exchange goods for goods.

To sum it up: If we were about to get into a hyperinflation scenario again, people would start to trade basic goods again. The only winners in such a scenario are the people or institutions with (huge) debt.