What is the difference between intrinsic and extrinsic value with relation to currency? Lets have a look at a 2009 South Africa 5c coin. The face value of the coin states that the bearer is entitled to trade the coin for R0.05 worth of goods. This extrinsic value however is only based on the faith of the currency and the country backing it. The face value refers to the extrinsic or external value. The internal value needs to be calculated.
A standard 5c piece has the following dimensions:
The weight of the coin with the current copper price gives us an estimated intrinsic value of R0.2196 or about 22c! If this was the case it would have been more profitable to melt the coin down for its copper than to use it for monetary exchange.
Have a look at the picture. The section of the coin shows that the copper is only a superficial layer. The majority of the coin is made of steel. Lets assume that the coin is made of 100% iron for comparison. Based on the current iron price the intrinsic value is about R0.000924 or 0.092c. Lets double this amount to account for other metals in the steel and the copper plating. Now the intrinsic value of the coin is approximately 0.2c (a fifth of a cent). This makes more sense since it is now more profitable to use the coin as currency rather than to melt it down.
This disconnect between the intrinsic and extrinsic value of our currency is one of the causes of inflation. It also places the management of the stability of our currency in the hands of our governments and central bankers. Since there is no barrier to creating money backed by real value governments can, and do, print money backed by no value. This is what happened to the Weimar Republic and more recently to Zimbabwe.
There is an old bit of wisdom that states “He with the gold rules,” I believe that in our current financial paradigm it is more accurate to say that he who prints the money rules.