The term money is nowadays used for all the banknotes and the coins that go with them. In reality, what we use today to exchange products and services is not money but currency. Fiat currency to be exact. Money and fiat currency have many things in common because of which they are easily confused or mistaken for the same thing. But the difference is what can never make fiat currency money. Therefore, it is important to know this difference in order to understand why this is so.
What is Fiat Currency: Fiat currencies are for example the U.S. Dollar, Euro, or Thai Bath. Fiat currencies get their value by people believing it has a value. In reality, it is a paper with a number on it. Coins are a mixture of cheap base metals that are supposed to represent the colors of gold or silver.
What is money, then?
Real money existed long before humans were on this earth. We humans have been using real money for 5000 years, which of course can only be gold and silver. Gold and silver differ from fiat currencies in the most important point of all and therefore only gold and silver can be called sound money.
So what criteria must be fulfilled for real money?
Medium of exchange: Real money must be a trade medium. It must be a measuring tool for the value of products and services and be exchangeable for them.
Unit of Account: Real money must clearly show its face value (e.g. numbered) and be able to be counted.
Long-lasting: Real money must be usable for a long period of time without changing its appearance.
Divisible: Real money must be divisible into smaller, equal parts to enable change.
Portable: Real money must be portable.
Equality: Each unit must be the same regardless of the owner. My ounce of gold must be equal to every ounce of gold.
Store of Value: Real money must retain its value, therefore, be a store of value.1
Let’s see if gold and silver or fiat currencies meet the requirements to be called real money.
|Fiat Currency||Gold and Silver|
|Medium of Exchange||Yes||Yes|
|Unit of Account||Yes||Yes|
|Store of Value||No||Yes|
As you can see, fiat currencies do not meet a crucial criteria to be called money, it is not a store of value. The proof of this can be seen on the U.S. Federal Reserve’s website. There it says as follows: “Fiat money is money that does not have intrinsic value and does not represent an asset in a vault somewhere.”2
The U.S. Federal Reserve speaks here falsely of money, whereas by fiat money it actually means fiat currency. The U.S. Federal Reserve’s definition of fiat currency clearly states that fiat currency has no intrinsic value, which is one reason why fiat currency is not a store of value. Furthermore, fiat currencies can be created out of thin air whereas gold and silver cannot, there is only a limited amount which makes it intrinsically valuable.