Wednesday, September 14, 2011

This is currency, that's value, what's Money?

People seem to use the words money and currency interchangeably.

Have a look at this from David Graeber's recent book:
"Money almost always arises first from objects that are primarily used as adornment of the person. Beads, shells, feathers, dog or whale teeth, gold, silver are all well known cases in point."
David Graeber Debt - the first 5000 years (2011) p.145

I think he really means cash or currency, rather than Money. Particularly because the thrust of his book is that Money is born from debt.

Or this, from Neil Ferguson's
"The Incas could not appreciate that, for Pizarro and his men, silver was more than shiny, decorative metal. It could be made into money: a unit of account, a store of value - portable power.
Neil Ferguson The Ascent of Money (2008) p.21

Again, what he actually means is that silver can be made into currency, rather than money.

You may think that I'm being pedantic. And I'm sure Messrs Graeber and Ferguson are aware that technically speaking currency and money have different meanings. What's more important is that we're all instinctively aware that Money and currency are different. Quite how they're different can be a matter of intense debate.

Those on the left of the political spectrum tend to see Money as 'nothing'. Just a number. Value comes from what we do and how we do it. Currency is useful in so much as it helps us to transfer value efficiently. If you need value to spread itself more widely, then you create more currency.

Those on the right tend to see Money as 'something'. More than just a number. Its value comes from the market. Currency has value if the market says so. If you want Money to keep its value, then you shouldn't create too much currency.

Money, currency and value do seem related though, on whichever side of the fence you sit.

Professor Davies made this point early on in his history of Money.
"...there is an unceasing conflict between the interests of debtors, who seek to enlarge the quantity of money and who seek busily to find acceptable substitutes, and the interests of creditors, who seek to maintain or increase the value of money by limiting its supply, by refusing substitutes or accepting them with great reluctance, and generally trying in all sorts of ways to safeguard the quality of money."
Glyn Davies  A History of Money (1994) p. 29

In terms of the standard definitions currency is a medium of exchange, and value is the worth of something as determined by the market. Both of which are beautifully circular. To complicate things further money is all of these things and more. Your average economist will tell you that money is a medium of exchange, a store of value, and a unit of account.

But smarter, more honest people will tell you that we don't really know what Money is.

The earliest point I can remember asking 'What is Money?' was in infant school when I was watching a TV programme on the coming decimalisation. The change in English coins and notes that occurred with decimalisation made it clear to me - even at that tender age - that currency and money were not the same thing. The notes and coins were changing, but Money would still be the same.

When I think about Money and currency I have a very clear image in my head. Currency connects us to Money. Imagine Money as a transcendental amorphous field of transformative energy. The coin in your pocket connects you to that energy. And clearly, it connects in a precise mathematical way.

When I went to study Economic History at the LSE, that childish question of 'What is Money?' was still in my head. Just as I finished my studies there, an academic book was published with a great title. The quote below comes from the introduction.

    "From a commonsense point of view, economic activity in the capitalist economy is all about money: making money, earning money, spending money, saving money, and so forth.
    Orthodox economic theory ...has had a persistent tendency to deny the importance of money and monetary factors in determining economic outcomes, despite the evidence of our senses."
John Smithin What is Money? (2000) p.1

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