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Wednesday, 23 April 2008

A foreign currency is not money in South Africa

A foreign currency is not money in South Africa since it is not the generally accepted national unit of account.

Money has three functions:

1. Medium of exchange
2. Store of value
3. Unit of account

A foreign currency like the US Dollar or the Euro is a medium of exchange in South Africa. Some businesses and individuals will accept US Dollars or Euros as a means of payment, that is, as a medium of exchange because they can easily sell the foreign currency amounts at their local banks for Rands.

A "hard currency" is also a store of value in South Africa. The US Dollar and the Euro are “hard currencies” with daily changing market values. They are generally accepted world wide as a store of value. People know that there are daily small changes in their exchange values.

US Dollars or Euros are, however, not the generally accepted and legal national unit of account. They are thus not money in South Africa since they do not fulfil all three functions of money.

Foreign currencies are variable real value non-monetary items in South Africa.

The US Dollar is only money outside the United States of America in countries like Ecuador and Panama that have dollarized their economies. They use the US Dollar as their functional currency. They do not have their own national currencies. The US Dollar is both foreign exchange and functional currency only in countries that have dollarized their economies. That is not the case in South Africa.

Cabo Verde is planning to use the Euro as its national functional currency.

It appears very strange to state that the US Dollar or the Euro is not money. Technically speaking that is correct because an economic item can only be money if it fulfils all three functions of money. The Euro is only money in the European Monetary Union and the US Dollar is only money in the US and in countries that have dollarized their economies, e.g., Panama and Ecuador.