How and why traders should distinguish between “money” and “currency.”

Introduction

In my last blog post, I commented on the improbability of the American government supporting an environment that would make cryptocurrency a viable alternative for conducting consumer transactions.  This conclusion should be no surprise because it would not be in the American government’s interest to cede control over the determination of legal tender.

While a seller is not required to accept your cash as settlement for a transaction, the government is not prepared for anything else but U.S. coin or paper money to be tendered to it for the payment of taxes.

I recommended in the last post that Congress, if serious about unleashing cryptocurrency’s innovation, should refuse the convertibility of cryptocurrency into cash.  I may have not made clear in the last post that convertibility should be refused when cryptocurrency is offered directly to the government for the payment of taxes.  Convertibility would still be expected between private parties during instances of trade.

Cryptocurrency traders will have to create an independent economic eco-system that supports autonomous exchange of the cryptocurrency with other crypto or fiat currencies.  What helps getting to this point of independence is distinguishing between “money” and “currency.”  I will offer two definitions not found in statutes, codes, or textbooks.

What is currency?

What is currency?  First, currency is a token generated by a private or public corporation.  A private corporation could be Kroger, Amazon, Google, Delta or your neighborhood hardware store or grocer.  The coupons or credits or flight miles they issue act like a currency because the coupon represents some underlying value you receive from trading at that store.

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As to a public corporation such as the U.S. government, the currency takes the form of U.S. paper dollars or coin representing the underlying value you receive from trading with or within that country.

Second, whether issued by a private or public corporation, demand for the token is a function of the quality of the corporation’s output.  For example, demand for the US dollar increases with the quality and quantity of its production; increases in interest rates; or increased returns on corporate shareholder equity.   The demand for Delta’s Sky Miles increases with the perception that the service is good relative to that of other carriers along with the travel perks that accompany the program.

Lastly, and this characteristic ties in with the definition of money, the currency itself has no intrinsic value.  As worthless as the dollar is, it cannot be used for toilet paper or fuel to burn a camp fire (not yet, anyway).  There are no strips of gold or silver in the paper or coin currency.  Neither can be used as physical components for building a mechanical product.  It is when currency represents money is when the currency takes on some value.

What is Money?

So, what is money?  Suppose you are hired to complete a job.  You keep your end of the bargain by completing the work.  You go to the contractor and ask, “Where’s my money?”  The money symbolizes the energy that you put into the work.  It represents, encapsulates, the energy you spent and you want that symbol in your hands.  That is money.

How you tokenize the energy is determined in an agreement between you and the contractor.  In this case, you decide to take your money in the form of, say, XCD, the Eastern Caribbean dollar.  The reasons for this choice are yours and may be qualified by the difficulty the contractor may have in getting “EC” as we called it back in the day.  But the point is that “money” is energy and “currency” a token.  Intrinsic value is found in money.

Currency’s just a thang…

For we traders who have no inside information on what a central banker trader or commercial bank trader sees, this insight helps to better analyze how a currency is moving and what is moving it.  This approach, that currency has no intrinsic value, is a function of an underlying matrix of interrelated markets, and is a token generated by a corporate body, brings us closer to the inconvenient truth: markets are not moved by an exogenous, invisible hand, but are moved by the sentiments and instinctive nature lurking in each of us.

I used to tell my economics students that money was just “a thang.”  Based on my observations today, I would tell them, “Currency’s just a thang, but money is energy.”

Alton Drew

1 August 2022

Disclaimer: This blog post should not be construed as legal advice or an agreement to provide legal or political analysis.  To set up a consultation, contact us at altondrew@altondrew.com.

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