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You invest money but spend currency – and it’s an important distinction

03rd April, 2023

Published in The Sunday Times on April 2nd 2023.

On Sunday, August 15th 1971, Richard Nixon changed the course of history. Before that weekend, all national currencies were pegged to the U.S. dollar, which was convertible to gold at a fixed rate of $35 an ounce. By the 1970’s there were far more dollars in overseas hands than the United States had gold to redeem at that price. 

In a televised address to the nation on that Sunday night, against a backdrop of dwindling US gold reserves, Nixon ordered that nations could no longer exchange their dollars for gold. Thus, ending the bedrock of the Bretton Woods system of mostly fixed exchange rates that had been in place since 1944. 

Since then, the world’s monetary system has consisted of (mostly) freely floating currencies. Nixon essentially set ‘money’ free - free to be printed without the limits imposed by a gold standard.

This article is about money - how we define it, think about it, and why we are most often wrong in our assessment - with very expensive implications.
You’ll often read that since the break with the gold standard, the US Dollar has declined by over 90%. In 1971 the official price of an ounce of gold was $35. Today, an ounce of gold buys approximately $1,800. That is a 5,000% increase in the price of gold, or seen another way, the value of the dollar has fallen 98% versus gold. This is an extraordinary collapse in purchasing power over the last fifty years.

Uninvested money should simply be referred to as currency

Beware of gold bugs - those numbers are meaningless. The analysis is a misrepresentation of real investment and output denominated in the dollar over that period. People generally don’t leave their dollars under the mattress. They invest dollars in instruments that earn cash flows from real investments. A household that simply held short-term government bonds maintained its purchasing power. Longer-dated bondholders did better again in real terms. The winners of the real return contest were of course equity investors, with a 6% p.a. return (US equities) in excess of inflation over the last half-century.

There is a critical difference here between uninvested money – what I prefer to term as currency – and money as we traditionally think of it.

Money is a means to an end. That ‘end’ is usually funding our lifestyles. If the price of that lifestyle is inflating at 5% p.a., your ‘money’ is losing 40% of its purchasing power every decade. Money, unless it’s invested in productive assets, will likely experience a decline in purchasing power, as befell the US dollar in the last half-century. It is in this sense that uninvested money should more appropriately be referred to as ‘currency’. And you should avoid holding much of it. 

The financial world has returned to normality

We’ve had almost a decade of so-called ‘return-free risk’. Since mid-2022, the financial world has returned to some semblance of normality, as interest rates have gone back above zero and now reside at 3% in Europe, with expectations of further rate hikes to come before Summer. Unfortunately, in Ireland, there’s no difference between sticking your currency under the mattress, or in a deposit in one of the main banks; Irish banks are so well-funded that deposit interest rates are zero.

Fret not. Money market funds and direct government bonds offer plenty of low-risk options for money that haven’t existed for several years.

But before making any decisions concerning uninvested cash, it’s important to return to an earlier point about money; how we think about it and how we define it will have implications for how we use and invest it.

We tend to think about money in nominal terms – euros and cents in our bank account. In the long run, the only rational definition of money is purchasing power. If my living costs double and my capital and interest thereon remain the same, I have effectively lost half of my ‘money’. As argued above, this is not money. It is simply currency. You only need enough of this to fund your day-to-day expenses.

We have all grown up with the misguided idea that the primary risk of investing is the loss of capital over short time horizons. Defined as such, we are doomed to make poor financial decisions. This measure of risk is only relevant for our currency.

If money is purchasing power, risk becomes that which threatens it, and security becomes that which preserves or enhances it. This is the critical issue. What preserves or enhances purchasing power over time? Real productive assets, like businesses for one. This is where financial security is to be found.

Uninvested money is simply currency. Treat it as such and accept a fate similar to that of the dollar, if holding it over long periods. With your money, you need to think differently. 


Market Data: Calendar year returns 2018 2019 2020 2021 2022
Golden Spot GTR 2.1 20.2 10.96 2.99 5.77
S&P 500 0.4 34.1 8.8 38.2 -13.0

Source: Bloomberg. Figures in Euros. Total returns.

Gary Connolly is Investment Director at Davy. He can be contacted at or on twitter @gconno1.

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