MONEY, CURRENCY, ANDFOREIGN EXCHANGE (FOREX)

The most basic questions and concepts we must address involvethe differences between money, currency, and foreign exchange(FOREX). All too often these terms are interchanged. With equalfrequency, the differences are blurred and misconceptions aredeveloped. Aren’t the three terms one and the same? The answeris no.The Barter Process and the Evolution of MoneyMoney is the primal evolution of barter. It was developed as aconvenient means for exchanging goods and services. If my edu-cation correctly serves me, the first recorded book entries dateback 5,000 years ago to the Sumerians who were defined as thefirst society. Book entries could only become a reality as numericsystems were developed. This is how money allegedly originated.Certainly, there were methods to exchange goods and serv-ices before the Sumerians. The barter process appears in cavewall drawings and remains widely used today. However, barterlacks efficiency because it inevitably involves considerable nego-tiation to consummate a transaction. Value must be determinedthrough a process of bidding and offering. Sound familiar? Forexample, suppose an ancient tribesman trapped a few beaverswhile a fellow tribesman caught several fish. Not needing all the beavers or all the fish, the two may decide to exchange beaver forfish. Depending on the perceived value of beaver pelts in themind of the fisherman versus the relative hunger of the trapper,some ratio of beaver to fish would be agreed upon.Understandably, perceived values will change. The first inklingof seasonality can be deduced from the previous example by over-laying the need for warmth during the winter onto the nonseasonalrequirement for food. Logically, pelts should fetch more fish astemperatures cool. The trapper is likely to fatten up during winter,but go hungry in the summer. This suggests that the trapper willexpand his product line to include meat as well as pelts. This over-comes seasonal problems. Both the trapper and fisherman mustspend the better part of their day accumulating their bounties.Perhaps neither has time to build or maintain shelter. However,another tribesman discovers that his lack of skills as hunter or fish-erman is offset by his ability to construct sturdy huts.The hut builder introduces the concept of cyclical supply anddemand as well as an underlying seasonal influence. He mustbuild huts when the weather is mild and there is easy access tothe ground. His unique challenge derives from his product’s dura-bility coupled with seasonal supply. He develops a prolongedbarter whereby he swaps a hut for a year’s supply of fish or meat.Thus, the hut builder’s commitment to exchange today is carriedforward in payments. Heavens! Was this the first mortgage?The model grows more complex when the hut builder dis-covers that the value of his trade exceeds his requirements forfish and meat. Since he cannot consume all he has bartered for,he decides to use his excess to acquire a wagon from the wagonmaker to transport his building materials and increase his effi-ciency. Perhaps he also exchanges fish and meat for tools. Theincreased efficiency only brings the hut builder more fish andmeat. He decides to train other hut builders with the under-standing that they will work for him and receive a portion of hismeat and fish. The first real-estate tycoon is made. In all likeli-hood, he doesn’t even pay for the land!We see an economic system emerging from barter. All thewhile, however, transactions and relative values must be negoti-ated. Eventually, the hut builder’s tradesmen may decide to gooff on their own. Suddenly, there is competition in the real-estatemarket