Previously
In the previous article, here, we went into depth and detail to define “money”. In addition, we made good faith efforts to measure the monetary attributes and characteristics of a commodity to derive the Chrematistics Index and its underlying indices (all of which I developed and coined).
Now, equipped with a working definition of money, let’s compare the terms “money” and “currency” and see what the major differences are.
Nomenclature
Before diving deep, let’s provide some nomenclature. In everyday parlance, we use “money” and “currency” synonymously. In normal usage, this is not a problem. But, for the sake of a deeper philosophical discussion, let’s separate the two:
- Money: hard money, good money, sound money, dependable money
- Currency: fiat money, credit-based exchange, loose money, soft money, bad money, undependable money
With regards to the term “fiat”, this comes from Latin which means “dictate, order, or decree“. In the context of fiat currencies, governments are mandating or dictating (by way of coercion or outright force) that their people must use their undependable money rather than some superior form of money that the market would naturally prefer and gravitate towards.
What Separates Hard Money From Soft Money?
In the previous article, we looked at the nine attributes and characteristics of money. With the obvious proviso that while there is no particular object or commodity which can fulfill all nine attributes perfectly, there have been been some commodities throughout history which have had the nine monetary characteristics to varying degrees. We would call these “hard money”. Common examples include (but are not limited to) gold and silver.
Ultimately, what supplants hard money with soft money (fiat currency) is when one small set of people (in government) mandates to another larger set of people (the citizenry) that they must use an inferior form of money. This mandate must always be accompanied by coercion, force, and threats of force. [1]
If I were pressed to point out the monetary attributes which ultimately separate hard money and fiat currency, the two most important attributes are verifiable and opportunity costed. We discussed those two attributes in the previous article, here. Ultimately, what makes these who properties so important is that reflect a money’s tie to reality. Let’s dig a little deeper into these two monetary characteristics to understand why they are so crucial for separating dependable money from soft money.
Verifiable
In the context of hard versus soft money, verifiable means the reasonable and cost-effective ability for any party to assure that the object in question contains the claimed contents.
One example is verifying a bar of gold or gold coin. Gold cannot realistically and reasonably be counterfeited at the sub-atomic level by adding or removing protons to the nucleus of some atom (such as iridium or mercury). But there are are numerous instances of bad actors embedding cheaper materials (i.e. using tungsten rods) in gold bars in order to make the bar weigh more for lower cost. While this has happened, it requires considerable effort and can be caught with reasonable counter-measures (i.e. melting down the gold bar). We briefly touched on the some ways that gold coins and gold bars can be tested objectively here.
For the vast majority of people, verifying gold bars or coins is neither easy, feasible, nor cost effective. The average individual must depend on centralized institutions to go through the verification process and the results must be trusted. Based upon this, one could argue that gold does not meet the criteria for verifiable.
As for physical dollars, these can be reasonably verified with built-in anti-counterfeiting measures, U.S. dollar bills can be forged. In fact, there are entire illicit industries (and some countries) devoted to that very practice. Thus, these anti-counterfeiting measures are often defeated. In some small measure, this ruins the verifiability of physical dollar bills. As individuals (and companies), we must trust that the government has built-in excellent and cost efficient anti-forging measures into physical dollars. They have not.
On the other end of the verifiability spectrum, electronic dollars cannot be reasonably verified. As common people, we must trust that our financial institutions have created and custodied these electronic dollars. Based upon the criteria for money in the previous article, here, true money does not require trust nor central parties. Consequently, both physical and electronic dollars fail the test for good money.
In a later article in this opening series, we’ll take a closer look at bitcoin to examine if it passes or fails the test for good money.
Opportunity Costed
In the previous article, here, we took a high-level look at the economic concept of opportunity cost and its value as one of the nine characteristics of dependable money. In summary, the opportunity cost of dependable money should be high. In fact, the opportunity cost should be so high that anyone who is considering creating new money must make a difficult decision as to whether they should mint money or use their time, efforts, and capital for other endeavors, such as building cars, opening a restaurant, buying a bond, or even working for someone else.
For example, the cost to produce a physical dollar bill is about 7.5 cents. For a $1 bill, this would be 7.5% of the face value. For a $100 bill, this would translate to 0.075% of the face value. The opportunity cost of creating a dollar bill is minuscule especially in comparison to its market value. Physical dollars (and all fiat currencies) do not meet the requirement for opportunity costs.
With regards to electronic dollars (in the M1 and M2 money supplies), the electronic costs (on a per unit basis) for creation and maintenance are essentially zero. In economic terms, we would say that the marginal cost of production is approaching zero. We looked at some of the estimated costs of production of physical and electronic dollars in the previous article here. Electronic fiat currencies are extremely low on the Opportunity Cost monetary attribute spectrum.
As for gold, the direct costs of digging up gold, purifying it, and forming it into a shape that is recognizable is high in comparison to its market cost. Along with the direct costs, a vendor has to make the decision every day to choose how they direct their finances, capital equipment, and operations (i.e. a gold production, run a supermarket, or move into finance) with corresponding opportunity costs costs. We looked at the costs of producing a troy ounce of gold in the previous article here. Based upon this, gold (and silver) meet the opportunity cost criteria quite well. [2]
With regards to bitcoin, just like with verifiable, we’ll test if bitcoin meets the criteria for good money in a later article in this opening series.
Central Bank Digital Currencies (CBDC’s)
There is one specialized case of currencies called “central bank digital currencies” (“CBDC’s“). We very briefly touched upon CBDC’s in a past article, here and here. In short, if implemented, CBDC’s would be one of the ultimate tools in the state’s toolbox of controlling the populace. [3] This control would come in three forms:
- Trade Control: Controlling when, where, and how much certain goods and services which can and cannot be purchased. Possible controls might include: restrictions on gasoline purchases, meat consumption, airline travel, etc.
- Surveillance: Giving the state the ability to monitor directly what are buying and selling, providing a feedback mechanism for the trade control above. For example, doing business with someone who is considered “socially undesirable“, monitoring if one group of people is consuming “too many resources” or engaging in “non-value added activities“.
- Social Engineering: With the above two tools of trade control and surveillance, governments have the ability to “fine tune” their populations for the purpose of surordinating the will and values of the citizenry to those in government. Examples might include: putting “expiration dates” on currency that are people’s bank accounts to encourage them to spend it faster for the purpose of increasing national GDP figures or “encouraging” a population to buy gov’t bonds in order to soak up the state’s debt.
If you think things are bad now, think of how much the state can control your lives when they can control your “money” and your ability to interact in the 32 market sectors (which we identified in a previous article, here). This will be orders of magnitude worse than 2020 – 2024 (and not getting the “poke“).
Needless to say, there are many in the world who are adamantly opposed to CBDC’s for the very fact that they give governments the primary means of being so authoritarian with the people, thus completely curtailing their individual liberties.
Civilizing Force
A major consequence of governments having control over your financial resources (your currency) is that they can supplant your values with their values. In this case, your ability to plan and save for the future has been completely hampered. You might have the desire to delay any immediate gratification that you would get from spending your money in the short term and, instead, set that money aside for investing in real estate or stocks or even your own company. In economics, we call spending money now for immediate gratification “high time preference” and saving money for investing in the future “low time preference“. [4]
With governments fiddling with your time preference, it has placed its values and philosophies above your own. As a consequence, the course of entire countries are changed and corrupted. A society’s ability to plan for the future, to plant the seeds of infrastructure, technology, and health are stymied. Instead, they focus on consumption and entertainment, like “bread and circuses“. [5] This is why fiat currency is a de-civilizing force and hard money is a civilizing force; because, they change time horizons, a.k.a. time preferences.
Next Steps
This article was kept short since the previous article was a bit, ahem, extended…
In the next article, here, we’ll examine reasons why the citizenry and the state would want to use fiat currencies despite their obvious shortcomings and deleterious effects.
Donations
If you found value in this article please feel free to donate via the following payment methods:
CashApp: $JohnYoung357
Venmo: @John-Young-359
Bitcoin: Bc1q6t5yyx28e3pzag7srxe8t9dpx39ldsytn3twux
End Notes, References, & Citations
[1] Rai stones from Yap Island and glass beads in Africa
There have been notable exceptions to this where the monetary systems of some region were severely disrupted not because of the mandate of state but superior technology actually devalued the then-current form of money.
- Rai stones of Yap island
- Glass beads in Africa
History Note: Famous Austrian school economist, Saifedean Ammous, covers the Rai stones and glass beads of Africa in his book “The Bitcoin Standard” on pages 9, 11 – 13, and 174.
[2] Gold from nuclear fusion
An interesting video, here, (“3 Tons of Gold Per Year from Nuclear Fusion?“) from Sabine Hossenfelder’s YouTube channel, here, highlights interesting speculation that gold could be a possible product of a certain type of man-made nuclear fusion. If this ever were to materialize, gold would flood the market, thus driving down its price and severely affecting its ability to be dependable money.
[3] De-facto CBDC’s
One could argue that we already have de facto CBDC systems in most countries. If a federal or national government wishes to inhibit or even outright confiscate a person’s or company’s currency then they merely need to mandate this to happen via law enforcement (i.e. the Department Of Justice), regulatory agencies (i.e. the Securities & Exchange Commission), or central banks (i.e. the Federal Reserve). The difference between these agencies confiscating your dollars and a CBDC is that they would require coordinated effort to make it happen.
With a pure CBDC, though, direct control of your currency would happen literally with the stroke of a few keyboard clicks by some unelected bureaucrat or administrator (in a central bank). They can control where, when, on what, and how you spend your money. And, they can still take it from you if you aren’t spending it quickly enough. This completely hamstrings your ability to engage in saving for the purpose of capital investing.
[4] high time preference versus low time preference
Famous Austrian school economist, Saifedean Ammous, covers the topic of time preference in his book “The Bitcoin Standard” on pages 7, 74 – 80, 143 as well as his book “The Fiat Standard” (covered in many pages). For those who want to a well thought out and documented book on why bitcoin is so important, please read both of Mr. Ammous’s books. He makes the case for bitcoin superbly.