Most people use the terms “currency” and “money” interchangeably. However, there is a very subtle — but significant — difference between them.
If you’re one of the few folks out there who understand the difference between currency and real money, then I’m positive you also understand what true wealth is. As Mike Maloney notes in Part 1 of his series on the Hidden Secrets of Money:
The whole world has been turned away from real money and fooled into using currency — a deceitful imposter that is silently stealing your two most valuable assets: your time and your freedom.
The truth is, those colorful pieces of paper in your wallet — the ones with pretty pictures of dead presidents and other historical figures on them — aren’t real money; they’re currency. Fiat currency, to be exact.
The Real Difference Between Money and Currency
What’s the difference, you ask? Well, a long time ago, the United States printed paper currency that was real money. Anybody could take those paper bills and legally redeem them for an equivalent amount of physical gold that was sitting in the vaults of the US Treasury. Gold, of course, is a precious metal with real value. Furthermore, the number dollars in circulation was limited by the amount of gold on hand at the US Treasury. In 1933, that changed. Thereafter, only central banks could convert dollars to gold.
Then, in 1971 the Bretton Woods system collapsed after the United States prohibited the world’s central banks from exchanging their dollars for gold.
The world has been using fiat money — unbacked currency with no intrinsic value — ever since.
Unfortunately, because fiat money isn’t linked to something of real value like gold and silver, it’s extremely vulnerable to becoming worthless. How vulnerable? Eventually, every fiat currency dies — it’s a historical fact.
As the people’s faith wanes in their paper currency, hyperinflation sets in, and the money rapidly loses value — usually annihilating nest eggs that took decades to build.
For a terrific overview on this topic, here is Episode 1 of Mike Maloney’s series on the Hidden Secrets of Money. Mike really knows his stuff and he has a knack for taking complicated subject matter and making it easy to understand.
By the way, if you’ve got the time, I strongly encourage you to check out all of Mike’s other Hidden Secrets of Money episodes as well. You’ll not only learn a lot, but I promise you’ll never look at money — and the world’s financial system — the same way again.
Enjoy!
Photo Credit: King World News
“Gold, of course, is a precious metal with real value.” Why? This is the part of this line of reasoning I can’t grasp. What is it about element #79–versus, say, element #74, tungsten–that makes it inherently valuable? What is the fundamental reason that gold allegedly has “real value” and currency does not? One is a metal, the other is manufactured paper, both two inanimate and not especially rare objects. Why is humans’ perception of gold’s value valid and the same perception of currency’s value invalid?
Ah, yes … You aren’t the only one who has asked that question, Kurt!
The unsatisfying — but correct — short answer is: because humans have valued gold (and to a lesser degree, silver) for the past 5000+ years.
In the earliest days, I suspect it was for its beautiful color and rarity. Later on, it was because its unique properties make gold the perfect form of money.
I will share my additional thoughts regarding your question in more detail next month. So stay tuned.
gold is valuable because it is a useful commodity. It is expensive because it is scarce. It is not by magic gold have been valued for 5000 years…
Obviously, it’s in a very different category than paper currency, but is it worth noting that gold and silver too are tied to what people are willing to pay for them? Is there any possibility that a day will come where people just decide that they don’t want to accept gold or silver anymore since its intrinsic value — that is, as a metal — can be reproduced inexpensively?
Hey there, Len! This post got me thinking about buying gold and silver through apmex.com again but I have 2 multi-part questions for you. #1a – Considering my income of only 40k per year, I’ll most likely never be able to max out my retirement fund to the max of 23k, so when would be the right time for me to start buying coins if at all? #1b – Should I just focus on contributing as much to my 401k and future Roth IRA as possible or should I be using a percentage for coins, if so how much? #2 – On apmex.com I see coins of the same amount of ounces and same purity but vastly different prices. I’m wondering how much other factors like the rarity of the particular coin and certifications really matter once the dollar collapses and I needed to purchase food with them. Basically, I’m asking how should I compare them and know which ones to buy.
Jen, I am going to reply to you in a personal email for #1a and #1b. As for which coins to buy, I stick to the American coins (American Gold Eagles and Silver Eagles). I also have “junk silver” — US quarters, dimes, dollars and half dollars minted prior to 1965. If want to buy gold coins, you’ll pay the lowest premiums on the 1 oz Eagles — as the size of the coin goes down (0.5, 0.25, and 0.1 oz) the premiums increase. Premiums are slightly higher on the US gold buffaloes.
For silver, instead of coins, you may want to consider buying 10 oz or 100 oz bars to capture the lowest premiums. If you want to reduce premiums for coins, Canadian silver maples generally have lower premiums than US Eagles and junk silver. I see nothing wrong with the Canadian coins, by the way — I just prefer the US coins.
I am in a similar situation to Jen financially. I would love to hear your thoughts you shared with her. Thank you!
Len,
One of the counter-arguments to gold is that when there has been a collapse of the economy gold did not become the currency or the means of exchange between individuals. The economy becomes a barter system. The argument is you would be better investing in land to grow crops or bottle water.
First, is this true? If true, what is the other side of this argument. This is why I am on the fence about buying gold and silver.
Gold has always — ALWAYS — been accepted as a means of exchange, Wendell.
Barter works, but it’s a terribly inefficient way to trade, which is why people will return as soon as they can to some sort of currency (that will have to be backed by gold or other tangible assets).
Yes, you can also invest in land, or food, or other items of real value — but the advantage of gold (and silver) is that it gives you more flexibility.
Money was invented as a store of value. You grow a crop, for example, and many times it has a definite shelf life (Some grains being the exception with very long shelf lives). Say I grow a crop of watermelons, and want to save the efforts of my labors to spend next winter…..or when I retire. I need money as a vehicle to do this.
And one of the more important properties of money is “a store of value”…..which gold and silver have proven to be over many centuries. There have been over 600 fiat curries over the centuries, and the average life of them is around 40 years…..so the ‘dollar’ is pushing that average.
Just in my lifetime, I can see how the fiat dollar has lost it’s value compared to silver. When I began driving in the early 60’s, gas was 2 silver dimes per gallon, or 5 gallons for a paper dollar.
Today, gas is still two silver dimes per gallon, a silver dime having a melt value of $1.25, and gas down the street right now is $2.49/gal….proving to me that long term savings should either REALLY REALLY gain in whatever investment vehicle you choose, or you should be setting precious metals aside for old age.
I’ve chosen a bunch of the latter.
Len,
have just been reading a book called Sacred Economics. It discussed pretty much the same ussues you raise in you article (I’ve been thinking about this a lot later as well) but the way the author puts it is fascinating: he compares the way the money departed from value to the way in which the gods left nature to take residence in heaven. The last thing that money left was – ironically – the economy (in 2008).
Interesting concept!
Possession of life-sustaining goods to barter is less flexible than money, but more assured of universal acceptance in the worst times, I think.
Also, barter is inherently more applicable in rural ares, simply because a relatively high percentage of life-sustaining goods is produced there.
Even in good times, there are advantages in some circumstances. For example barter is hard to tax effectively.
“…but more assured of universal acceptance in the worst times, I think….” (barter).
Likely so….IF we get down to the hardest of times….something close to a Mad Max world. I’m a big fan of beans, bullets and bandaids, and stock a lot of things of that nature.
BUT the more probable scenario is just what I’ve seen over my 60+ years….a long, slow, PLANNED decline in the value of fiat dollars. And this is where precious metals really shine….no pun intended.
Very well explained difference in both current & money, obviously both categories mean is different. I love so much that types of thought you shared. thank you!
I agree with the terms explained above and the fact is that currencies are changing over the decades but most of the people don’t even able to differentiate in between money and currency. Well written, thanks for sharing the valuable information.
Len, thanks for sharing the basic difference between money and currency. Explained very well in simple and easy words.
My pleasure, Al.
Gold- For most countries gold is real money. In our country, India, half of the gold within the country is in the hands of housewives.
I was someone who did use the terms money and currency interchangeably. Well, not anymore!
Very well written. It is true that many people wouldn’t be able to differentiate between money and currency.
You have made some great points! Thanks for sharing!
I totally love to visit your blog, Len. The information shared here is exceptional when compared to other personal finance sites. Much more complete and its very appreciated. Thank you.
Very informative post. I never knew this! Thanks for sharing with us.
I read somewhere about POW camps during WW2, and how cigarettes became money; not backed by gold or silver, but they were easy to transport and rare and everyone wanted them. Which made them money, right?
Years ago I lived in Berkeley. There was a huge used bookstore called Moe’s. Moe’s would take your used books and give you a credit slip. People used those as currency; you couldn’t pay the light bill with a Moe’s credit slip, but you could sometimes pay a gambling debt with one. Maybe that’s barter.
That is indeed barter, Kate.