Thursday, 22 December 2016

On Currency-Money Dichotomy

The idea of currency-money dichotomy is analogous to the theory of body-soul dichotomy. 

Currency consists of the banknotes and coins issued by the central bank that are in circulation. When the central bank issues currency, it is issuing credit. 
A transaction through currency is a transfer of debt from one party to another. In a currency based transaction the debt is not extinguished; it is merely transferred.  

Money stands for something like gold, silver, or any other commodity that has an objective value of its own. Economist Keith Weiner points out that money is the most marketable commodity.

When the transactions are carried out through real money the debt is not transferred; it is extinguished. This is because the currency being used has an objective value of its own. It is not necessary for the currency to be made from gold, silver, or any other commodity. In a gold standard system paper currency can be issued by the central bank or the private banks. But this paper currency must be redeemable in gold.

Just as the theory of soul-body dichotomy has created a havoc in ethics and epistemology, the idea of currency-money dichotomy is creating a havoc in economics.

When currency does not have an objective monetary value, the financial transactions have to be backed by government power.

In a paper money system, the financial value of the piece of paper or coin that we regard as currency is dependent on the pleasure of the government. Out of political considerations or economic confusion, the government may demonetize the currency at any point of time leading to incredible hardships for the people and the businesses.

Also, when the currency is not linked to real money (which is gold, silver or any other commodity), the government enjoys the power to issue credit for speculative bubbles which result in speculative mania and inflation in the price of assets. When the bubble bursts there is massive sell-off and many businesses get ruined.

As long as the government has control over the issuance of currency, the economy will be plagued with all kinds of problems. We must adopt gold standard because it is the only way of safeguarding the private property of the individuals and businesses, and ensuring economic growth. 


Knee India said...

Could you kindly connect credit and debt in the first two paras?

Anonymous said...

The paper currency that we use currently is essentially a credit issued by the government. So when you use it to buy something from a shop, you are transferring the credit that you received from the government to the shopkeeper. Earlier the government owned a debt to you, and after the transaction the debt gets passed on to the shopkeeper.

In other words, the transaction does not lead to an extinguishing of the debt. The debt gets passed on.

Anoop Verma