Here is the third and final essay for the University of Nicosia MOOC on cryptocurrency’s first lesson, Introduction to Digital Currencies. My other responses can be found here.

The prompt: Post 2-3 paragraphs comparing any two types of currencies along the dimensions of the functions of currency and rate their pluses and minuses in this regard.

Currency is useful in an economy by performing three primary functions, as a medium of exchange, a store of value, and a unit of account.  The functions are independent but mutually reinforcing, and different types of currencies perform each function better or worse than other currencies.  The advantages and disadvantages between primitive, commodity currency and paper fiat money strongly illustrate this concept.

As a medium of exchange, a currency is a common intermediary which allows for a standard comparison of value between diverse types of assets for trade.  Without media of exchange, sellers are forced to accept as pay for their wares only items their suppliers might accept in trade, a type of transaction cost known as a double coincidence of wants.  As a medium of exchange paper currency is superior to commodities across many dimensions.  Paper money is highly fungible and divisible since each note is consistent with the next and multiple notes of varying denomination are typically issued.  Contrarily, the fungibility and divisibility of different commodities might be greater (one kilogram of salt) or lesser (one cow).  Furthermore, paper money is generally easier to transport than most commodities, further enhancing its value as a medium of exchange.

A good store of value permits individuals to retain wealth over a period of time with a measure of predictability about the asset’s future worth.  The supply and demand, as well as expectation about future supply and demand, all affect the value of a currency, whether commodity or paper.  Many commodities used as a currency have some inherent utility and therefore floor on demand; whereas, the demand for paper money is generated solely by its use as a currency.  The supply of commodities may experience a sudden shock if a new reserve is found or a big cache is destroyed.  On the other hand, the supply of paper money is generally determined by a central bank or other sovereign authority.  The predictability of future value varies widely among paper and commodity currencies, so neither is inherently more advantageous as a store of value.

A unit of account allows for a standard measure of the worth of disparate assets, liabilities, and economic activities.  Deflating money leaves its holders better off just as Inflation in a currency may benefit holders of debt denominated in the currency; however, up and down movement in the value of paper money or commodities complicates the comparison of the currency across time.  The utility of a currency as a unit of account depends less on whether it is paper money or commodity than it does on the form of paper money or the particular type of commodity.