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What is the difference between Money and Currency?

Well, FIRSTLY – they are VERY DIFFERENT THINGS!

Money is ANYTHING which has the following properties:

1. It retains its value over time
2. Can be exchanged for any items of equivalent value – directly or, indirectly.

Currency, on the other hand has the following properties:

1. Its value depends on the amount in circulation.
2. Can be exchanged for any items of equivalent value – so long as the banks remain open.

Currency is affected by INTEREST RATES controlled by the Central Bank. The bank and the currency it issues are fundamentally intertwined. You cannot have one – without the other. The AMOUNT of currency in circulation – is what controls its value. Increase interest rates, and you will see the amount of currency in circulation DECREASE (at least, in theory) – since people will be tempted to save rather than spend. Now, theoretically decreasing interest rates SHOULD increase the amount of currency in circulation since it cost less to borrow, and earns you little to save. Much better to use borrowed money when the interest rate are low, than to dip into you own savings – at any rate – and the very ACT of borrowing increases the amount of currency available – since banks CREATE CURRENCY THAT WAY!

Money on the other hand, cannot be arbitrarily created from nothing. Gold or silver represent “real” money because their stock depends on the amount which can actually be mined. If goods and services can be created at an equal rate at which a certain amount of gold or silver can be mined – then the value of money stays exactly the same. If demand for goods and services increases faster than the rate of production – then prices for the goods and services will go up. Prices going UP – is what we call INFLATION.

And that’s not a bad thing.

But if there simply isn’t enough gold or silver around – to buy these things – then the value of this money actually INCREASES FASTER than the price of the goods and services it is supposed to purchase. Then we have, DEFLATION – which isn’t a good thing.

This kind of deflation is precisely the one which hit he world in the 1930’s. And it has been the reason why most economists are so reluctant to return to either gold or silver – as a standard for currency value.

What has happened however is that, as of 1971 – when then President Nixon took the United States of America off the gold standard completely – to help finance the Vietnam War – the U.S. Dollar no longer had any intrinsic value. You could theoretically create as much as “money” as you needed. Essentially, you could create as MUCH inflation as was NEEDED – and avoid DEFLATION forever.

So…. how come the U.S. is now in a DEFLATIONARY SPIRAL?

Prices are coming down, the value of the currency is going up… BUT – so is the value of GOLD!

That’s not supposed to happen. Or, is it?

Apparently, the CENTRAL difference between “Money” and “Currency” – is not JUST in the rate at which it can be created – but the FAITH people place in that medium of exchange.

And it seems that people have shifted from saying “In God We Trust” – to “In Gold We Trust!”

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