Currency
A lot of people think currency is money. For instance, when someone gives you some cash, you presumably think of it as money. It is not. Cash is simply currency, a medium of change that you can use to purchase something that has value, what we would call an asset.
Currency is derived from the word current. A current must keep moving or else it will die (think electricity). A currency does not store value in and of itself. Rather, I am a medium whereby you can transfer value from one asset to another.
Money
Money, unlike currency, has value within itself. Money is always a currency, in that it can be used to purchase other items that have value, but as we’ve just learned, currency is not always money because it doesn’t have value in itself. If you are having a hard time grasping this, just think about a hundred-dollar bill. Do you think the paper is worth $100?
The answer is, of course, no. That paper simply represents the value that is stored somewhere else – or at least it used to be before our money became currency.
Fiat Currency
A fiat is an arbitrary decree, order, or pronouncement given by a person, group, or body with the absolute authority to enforce it. A currency that derives its value from declaratory fiat or an authoritative order of the government is by definition a fiat currency. All currencies in use today are fiat currencies.
Adventures in Currency Creation
Fiat currencies don’t usually start out that way, and those rare cases when they have were very short-lived. Societies usually start with high-value commodity money such as gold and silver. Gradually, the government hoodwinks the population into accepting fiat currency by issuing paper demand notes that are redeemable in precious metals. These demand notes (currency) are just “certificates of deposit,” “receipts,” or “claim checks” on the real money that is in the vault. I would venture to say that many Americans think this is how the U.S dollar works today.
Once a government has introduced a paper currency, they expand the currency supply through deficit spending, printing even more of the currency to cover that spending, and through credit creation based on fractional reverse banking (something we’ll cover later on). Then usually due to war or some other national emergency, like foreign governments or the local population trying to redeem notes (bank runs), the government will suspend redemption rights because they don’t have enough gold and silver to cover all the paper they printed, and poof! You have fiat currency.
From the book “Guide to Investing in Gold & Silver” by Michael Maloney
