We all use money and more often than not money and currency are used interchangeably, but they are not the same. In this post, we are going to discuss the differences between money and currency and the history of transactions.
What is a transaction?
So first of all what is a transaction? Simply put a transaction is an exchange of goods and services between people or any entity in a society.
So first let’s start with the history of how transactions used to occur before the introduction of money.
Barter system: In this system direct trade of goods and services happened, that is individuals exchanged items without a common medium of exchange. For example, people might exchange rice for apples, or crops for wood, etc.
Commodity Money: This system realized the need for a common medium of exchange. One of the early examples is the rai stones. The value of the stones was determined by their history and characteristics. Gold and silver money in monarch times are examples of such a system.
Fiat system: This system emerged when the demand for quantity of money exceeded the supply of commodities used in making the money. This was the time when paper currency was introduced. Now unlike the other two system, this did not have any backing of any real thing and is mostly based on trust in the issuing authority.
Currency
Currency refers to a form of money that is commonly used within an economy for transactions. it is the physical representation of money that is used for buying and selling goods and services. It is tangible in form and loses value due to factors like inflation.
Examples of different currencies used in different economies can be the US dollar which is the United States currency, the Indian National Rupee which is India’s currency, Pound Sterling is the currency of Great Britain, the Euro is the currency of Germany and Renminbi is the currency of China.
Now one thing to note here is that all the above are fiat currencies and are not backed by any physical asset as used to happen previously in the history of human transactions.
Money
Money is anything that has value and can be used for transactions. It can be precious metals like gold and silver, currency, or something else that has value. Therefore if you would have understood currency is a subset of money. Money can be both tangible and intangible form. The money aims to maintain its value over time. Money facilitates exchanges, and accounting and acts as a store of value.
So if you have followed the post till here you would have understood how we went from barter to commodity-backed money to fiat currency. Fiat currency which is not backed by anything but trust in the issuing authority loses its value over time. So in order to maintain the value that we have earned we need to get something that is backed. Now these are the things in which we should invest and no doubt that people have been investing in gold and real estate for ages since these are tangible.
This is all for this post. Comment your thoughts below. Don’t forget to follow my Facebook and Instagram pages for regular updates. See you all in the next post, till then keep learning.