Ask anyone on the street this question, “What is the difference between currency and money?” I bet you’ll discover that most people haven’t got a clue. This is not surprising because the subject is so out of the mainstream. Nevertheless, knowing the definition of these terms and developing a clear understanding of their differences has potential to dramatically impact your behavior. Thus I have chosen to devote an entire chapter to the subject.
Question: Is that twenty dollar bill in your pocket really worth $20? Look at it; it’s just a piece of paper with some ink on it. Now, if I offered you to trade me any old piece of paper for 20 loaves of bread or 10 bags of potatoes you’d probably refuse. These goods have much greater value than some random piece of paper. And yet, those items are easily bought and sold for that $20 bill in your wallet every single day. So I ask you, why in the world should that particular piece of paper be worth $20? What gives it power?
In order to really understand this issue, we have to define two terms, namely value and buying power. Value comes in two varieties, absolute (intrinsic) and relative. Here is a simple example of this distinction. A pound of sugar relative to the measurement of weight is one pound. A pound is an absolute unit of value relative to weight; it is exact and it does not change. A pound is a pound and will always be a pound. However, a pound of sugar relative to a measurement of cost varies. You may be able to go into three different stores and buy a pound of sugar for three different prices in each. Furthermore, as you likely remember, a pound of sugar fifteen years ago did not cost nearly as much as it does today. This is because a dollar represents relative value, not absolute…