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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?

What is a Monetary System?

Any review of the history of currencies will show that there are ongoing attempts to simplify monetary systems. The Euro is the culmination of numerous attempts by Germany to unify its currency. Germany introduced similar currency reforms in 1690, 1753, 1837, 1857 and 1871. The push for monetary unity lay behind the push for political unity in Germany in the Nineteenth Century, as well as in Europe in the Twentieth Century.

In Germany in the 1800s, the Thaler and Gulden were the primary units of account. Although many political entitites issued coins, it was in the interest of each issuer to follow a single standard since this would increase the likelihood that Thaler or Gulden coins would be accepted outside of their own principality or kingdom, generating more seignorage for the issuer.

Because of differences in the commodity content of the coins, or because of different subdivisions of the coins issued by different principalities or kingdoms, you could argue that each principality issued a separate currency, especially since the coins fluctuated in value against each other. Similarly, paper currency issued by private banks within a country such as the United States often traded a discount to their true value and to each other.

Just as the banknotes issued by different banks in the United States did not consist of separate currencies, the coins issued by different principalities were not separate currencies since the issuers wanted their issues to be part of a unified monetary system, not to create a separate system.

This principle could be applied to the Latin Monetary Union and the Scandinavian Monetary Union in which the coins of all member countries circulated as legal tender within other members' countries. Belgian Franc, Swiss Franc and Italian Lira coins were legal tender in France while the Latin Monetary Union existed.

Instead of listing each locally issued coin as a "currency," we simplify this by using a single currency code for all of the coins issued within a currency area. For example, we give the German Convention Thaler the symbol XDCT and have it represent all Thalers and divisions of the Thaler in Germany during that period of time. We have tried to err on the side of minimizing the number of historical currencies that existed, rather than maximizing them.

By Dr. Bryan Taylor, Global Financial Data Chief Economist