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Paper Money Glossary and Terminology

What is a Monetary System?

When is a Currency Currency?

When is Money Legal Tender?

When is Money Money?

When is Money Money?

Money includes the coins and currency issued by the governments and central banks throughout the world, but it also includes anything that is commonly accepted as a medium of exchange. Today, the coins and currency issued by the government act as a medium of exchange, a unit of account and a store of value. In the past, account currencies, paper currency and coins often existed independently of one another, rather than existing as a unified whole. There were different forms of money for transactions over time (account money), large transactions (paper money) and everyday transactions (coins).

Today, the government's currency encompasses all three of these services. United States Dollars include electronic dollars, paper money, and small coins. In the past, this was not true. In Sweden, for example, there was account (banco) money, paper money and commodity (gold, silver, copper) money, and all three had different values relative to each other.

Throughout history, government has been able to legally define what is money and what is not. Even in ancient time, some countries, such as Egypt, has closed currency areas. This meant that no foreign coins could be imported and anyone entering the country had to turn foreign coins over to the authorities to be exchanged for domestic coins. When Egypt was incorporated into the Roman Empire, it lost this privilege. Other cities that lacked either their own silver mines or a government strong enough to enforce monetary controls allowed coins from any part of the world to trade at their face value. This pattern continued into the 20th Century when coins such as the Maria Theresa Dollar, British Gold Sovereign, or Trade Dollar were specifically minted for use in countries that lacked their own medium of exchange.

To see how the monetary system worked in the past, let's say that you owed someone $100 in the Nineteenth Century. Between the time the debt was established and it was paid off, the value of the paper money could decline relative to gold, or the government could debase its gold and silver coins by issuing new coins with a lower gold or silver content. You might have to pay the $100 debt on account with $125 in new gold coins or $150 in paper money, even though all accounts were in "dollars".

Some countries had no legal tender, or several, and the debt could be paid in pounds or francs, silver or gold. Gold, silver and copper coins changed their values relative to one another over time as the supply and demand for different commodities changed, and as the government changed the commodity content of different coins. Eventually, the commodity value of coins was eliminated altogether.

In many countries, there were not only three different versions of each "money", but different currencies that circulated simultaneously. Small countries or colonies might accept several foreign currencies as legal tender, or use the coins from several different countries. If the Maldive Islands could not afford to create its own currency, it was easier to use someone else's money instead. Even if the Maldive Islands introduced its own currency, its citizens might trust foreign currencies more than their own, even as people in many countries trust the United States Dollar today than their own domestic currency.

Countries like Germany lacked a single currency because different principalities, bishoprics, or other political entities could issue their own money. A government could devalue its currency by reducing the silver or gold content, by declaring old currency worthless, or making it worthless through inflation. Even in countries that might have a single system, monetary chaos could reign. Spain at one point had 139 different coins circulating simultaneously within the country.

Within each country, coins from different nations might circulate freely according to supply and demand. In the United States, the Spanish Real and Half-Real were preferred to the dime and half-dime in the early 1800s. Just as United States Dollars are used as a medium of exchange in countries throughout the world, Spanish Trade Dollars, Maria Teresa Dollars and other coins were just as likely to circulate outside of their country of origin as in the country where they were minted.

Until the Twentieth Century, this was the norm. You might have had a single monetary system for a country, but the values of the media of exchange fluctuated against one another. The result was chaotic. Although the Twentieth Century led to a proliferation of national currencies, it did produce a unification of the currency within each country.

By Dr. Bryan Taylor, Global Financial Data Chief Economist