The Currency Talk

Money vs Credit

So you want to understand what money and currency are? We all end up asking ourselves this question sooner or later. The first thing to understand is that money and credit are different. Credit is an outstanding unreciprocated balance.

Currency is that which is current. In other words, its ability to be used for payments immediately is more important than how its value changes over time. It is not essential for it to retain its current purchasing power forever, in fact, it is reasonable that the most acceptable exchange medium will require the lowest rate of interest, to induce people to accept or hold that, at least compared to other assets. This is similar to the idea known as Greshm's law, although the justification "bad money beats out good" is vague and confusing. Put simply, the easier it is to be accepted as a means of payment, the more you will tolerate subpar performance as a store of value.

Importantly, currency can be thought of as "that which pays a debt". And so, this is another reason why inflation is more acceptable than appreciation or deflation. If a debt unexpectedly increases, the debtor is on the hook, and they face foreclosure or default, a costly and unpredictable process.

Meanwhile, if a currency inflates, that reduces the size of debts, and so creditors take a loss. However, this does not disrupt the normal operation of the contract, and it is typically expected that creditors have greater financial means and are more sophisticated so as to be able to hedge their risks, whereas debtors are often working for an income at a fixed rate, such as a wage, potentially with only one source of income. The creditor should be able to factor potential inflation into the rates they charge.