"Money is routinely defined by what it does, rather than what it is. That is unfortunate because its modern definition overlooks money’s important – but now forgotten – fourth function.
"Aristotle observed that money is a medium of exchange, unit of account, and store of value. This definition omits the fourth function needed to explain money and currency in our modern economy....
"[T]he word ‘currency’ only came into existence in the late 1600s when a nascent banking industry began taking root in London and paper banknotes started circulating. Anyone who accepted a banknote knew that it was not money, namely, silver or gold coin, but rather, a money-substitute that was only a promise to pay money on demand. Thus, banknotes were recognised simply as currency from the Latin ‘currens’, meaning running or moving like the current of a river. Silver and gold money have existed since the dawn of civilisation, so compared to their track record, currency is a relatively modern term....
"As governments removed precious metal coin from circulation in the twentieth century, the distinct concepts of money and currency became conflated. It is an understandable result because money and currencies both convey purchasing power, thereby performing Aristotle’s three functions. Money-substitutes, however, come with risks not found in money, highlighting the importance of its overlooked fourth function – the payment needed to conclude a transaction....
"Final payment is achieved when the obligation of the payer to the payee is extinguished ... When any of today’s currencies are used to purchase a good or service, payment is not concluded at the time of purchase... Regardless of whether the currency used in a payment is paper banknotes or bank deposits circulated by cheque, plastic cards, wire transfers, or online, all national currencies in circulation today are a liability of some bank. The bank owes you the purchasing power that you placed with it. When you purchase a good or service, your purchasing power is then conveyed to the merchant by the currency you use in the transaction....
"Payment by money is an immediate and final transfer of purchasing power from the payer to the payee. In contrast, national currency is conveyed in a three party transaction requiring clearing and settlement processed through the banking system, which introduces the counterparty risk that a bank may default....
"Since the emergence of banks in seventeenth century London that included the founding of the Bank of England in 1694, humanity has built a monetary system with ever-growing complexity that has become so vulnerable to collapse it is no longer fit for purpose. The disadvantages of using bank liabilities as currency are writ large by recurring bank crises and the costs of bailing-out ‘too big to fail’ banks. Fortunately, there is a solution.
"Lending and payments need to be separated. They are distinct businesses that should not be combined in one entity. In this way, bad banks that collapse into insolvency will not threaten the payment system. Payments should instead be made by companies focused solely on providing with modern technology a safe and efficient currency, or even better and more importantly, re-establishing the circulation of money to fulfil its four functions."~ James Turk, from his post 'The Forgotten Fourth Function of Money and G-SIBs'
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