Everything about Currency totally explained
A
currency is a
unit of exchange, facilitating the
transfer of
goods and/or
services. It is one form of
money, where money is anything that serves as a medium of exchange, a
store of value, and a standard of value. A currency is the dominant medium of exchange. To facilitate
trade between currency zones, there are
exchange rates, which are the prices at which currencies (and the goods and services of individual currency zones) can be exchanged against each other. Currencies can be classified as either
floating currencies or
fixed currencies based on their
exchange rate regime. In common usage,
currency sometimes refers to only paper money, as in
coins and currency, but this is misleading. Coins and paper money are both forms of currency.
People throughout history have tried in test labs and scientific workshops to attempt different sorts of currecy, such as the dollar or naira, to grow on plants, bushes, or trees. Of course, we've not yet been successful in our experimenting, but soon their may be a way.
In most cases, each
country has
monopoly control over the supply and production of its own currency. Member countries of the
European Union's
Economic and Monetary Union are a notable exception to this rule, as they've ceded control of monetary policy to the
European Central Bank.
In cases where a country does have control of its own currency, that control is exercised either by a
central bank or by a
Ministry of Finance. In either case, the institution that has control of monetary policy is referred to as the monetary authority. Monetary authorities have varying degrees of autonomy from the governments that create them. In the
United States, the
Federal Reserve System operates without direct interference from the legislative or executive branches. It is important to note that a monetary authority is created and supported by its sponsoring government, so independence can be reduced or revoked by the legislative or executive authority that creates it. However, in practical terms, the revocation of authority isn't likely. In almost all
Western countries, the monetary authority is largely independent from the government.
Several countries can use the same name, each for their own currency (for example
Canadian dollars and
United States dollars), several countries can use the same currency (for example the
euro), or a country can declare the currency of another country to be
legal tender. For example,
Panama and
El Salvador have declared U.S. currency to be legal tender, and from 1791-1857,
Spanish silver coins were legal tender in the United States. At various times countries have either re-stamped foreign coins, or used
currency board issuing one note of currency for each note of a foreign government held, as
Ecuador currently does.
Each currency typically has one fractional currency, often valued at of the main currency: 100
cents = 1
dollar, 100
centimes = 1
franc, 100
pence = 1
pound. Units of or are also common, but some currencies don't have any smaller units.
Mauritania and
Madagascar are the only remaining countries that don't use the decimal system; instead, the Mauritanian
ouguiya is divided into 5
khoums, while the
Malagasy ariary is divided into 5
iraimbilanja. However, due to
inflation, both fractional units have in practice fallen into disuse.
See
non-decimal currencies for other (mostly historic) currencies with non-decimal divisions.
History
Early currency
The origin of currency is the creation of a circulating
medium of exchange based on a
unit of account which quickly becomes a
store of value. Currency evolved from two basic innovations: the use of counters to assure that shipments arrived with the same goods that were shipped, and later with the use of silver ingots to represent stored value in the form of grain. Both of these developments had occurred by 2000 BC. Originally money was a form of receipting grain stored in temple granaries in
ancient Egypt and
Mesopotamia.
This first stage of currency, where metals were used to represent stored value, and symbols to represent commodities, formed the basis of trade in the
Fertile Crescent for over 1500 years. However, the collapse of the Near Eastern trading system pointed to a flaw: in an era where there was no place that was safe to store value, the value of a circulating medium could only be as sound as the forces that defended that store. Trade could only reach as far as the credibility of that military. By the late
Bronze Age, however, a series of international treaties had established safe passage for merchants around the Eastern Mediterranean, spreading from
Minoan Crete and
Mycenae in the North West to
Elam and
Bahrein in the South East. Although it isn't known what functioned as a currency to facilitate these exchanges, it's thought that ox-hide shaped ingots of copper, produced in
Cyprus may have functioned as a currency.
It is thought that the increase in piracy and raiding associated with the
Bronze Age collapse, possibly produced by the
Peoples of the Sea, brought this trading system to an end. It was only with the recovery of Phoenician trade in the ninth and tenth centuries, that saw a return to prosperity, and the appearance of real coinage, possibly first in Anatolia with
Croesus of
Lydia and subsequently with the Greeks and Persians.
In Africa many forms of value store have been used including beads, ingots,
ivory, various forms of weapons, livestock, the
manilla currency, ochre and other earth oxides, and so on. The manilla rings of
West Africa were one of the currencies used from the 15th century onwards to buy and sell slaves.
African currency is still notable for its variety, and in many places various forms of
barter still apply.
Coinage
These factors led to the shift of the store of value being the metal itself: at first silver, then both silver and gold. Metals were mined, weighed, and stamped into coins. This was to assure the individual taking the coin that he was getting a certain known weight of precious metal. Coins could be counterfeited, but they also created a new
unit of account, which helped lead to
banking.
Archimedes' principle was that the next link in currency occurred: coins could now be easily tested for their
fine weight of metal, and thus the value of a coin could be determined, even if it had been shaved, debased or otherwise tampered with (see
Numismatics).
In most major economies using coinage, copper, silver and gold formed three tiers of coins. Gold coins were used for large purchases, payment of the military and backing of state activities. Silver coins were used for large, but common, transactions, and as a unit of account for taxes, dues, contracts and fealty, while copper coins represented the coinage of common transaction. This system had been used in ancient
India since the time of the
Mahajanapadas. In Europe, this system worked through the
medieval period because there was virtually no new gold, silver or copper introduced through mining or conquest. Thus the overall ratios of the three coinages remained roughly equivalent.
Era of hard and credit money
In
premodern China, the need for credit and for circulating a medium that was less of a burden than exchanging thousands of
copper coins led to the introduction of
paper money, commonly known today as
banknotes. This economic phenomenon was a slow and gradual process that took place from the late
Tang Dynasty (618-907) into the
Song Dynasty (960-1279). It began as a means for merchants to exchange heavy coinage for
receipts of deposit issued as promissory notes from shops of
wholesalers, notes that were valid for temporary use in a small regional territory. In the 10th century, the Song Dynasty government began circulating these notes amongst the traders in their
monopolized salt industry. The Song government granted several shops the sole right to issue banknotes, and in the early 12th century the government finally took over these shops to produce state-issued currency. Yet the banknotes issued were still regionally-valid and temporary; it wasn't until the mid 13th century that a standard and uniform government issue of paper money was made into an acceptable nationwide currency. The already widespread methods of
woodblock printing and then
Bi Sheng's
movable type printing by the 11th century was the impetus for the massive production of paper money in premodern China.
At around the same time in the
medieval Islamic world, a vigorous
monetary economy was created during the 7th-12th centuries on the basis of the expanding levels of circulation of a stable high-value currency (the
dinar). Innovations introduced by Muslim economists, traders and merchants include the earliest uses of
credit,
cheques,
promissory notes,
savings accounts,
transactional accounts,
loaning,
trusts,
exchange rates, the transfer of credit and
debt, and
banking institutions for loans and
deposits.
In Europe paper money was first introduced in
Sweden in 1661. Sweden was rich in copper, thus, because of copper's low value, extraordinarily big coins (often weighing several kilograms) had to be made. Because the coin was so big, it was probably more convenient to carry a note stating your possession of such a coin than to carry the coin itself.
The advantages of paper currency were numerous: it reduced transport of gold and silver, and thus lowered the risks; it made loaning gold or silver at interest easier, since the specie (gold or silver) never left the possession of the lender until someone else redeemed the note; and it allowed for a division of currency into credit and specie backed forms. It enabled the sale of
stock in
joint stock companies, and the redemption of those
shares in paper.
However, these advantages held within them disadvantages. First, since a note has no intrinsic value, there was nothing to stop issuing authorities from printing more of it than they'd specie to back it with. Second, because it created money that didn't exist, it increased inflationary pressures, a fact observed by
David Hume in the 18th century. The result is that paper money would often lead to an inflationary bubble, which could collapse if people began demanding hard money, causing the demand for paper notes to fall to zero. The printing of paper money was also associated with wars, and financing of wars, and therefore regarded as part of maintaining a
standing army.
For these reasons, paper currency was held in suspicion and hostility in Europe and America. It was also addictive, since the speculative profits of trade and capital creation were quite large. Major nations established
mints to print money and mint coins, and branches of their treasury to collect taxes and hold gold and silver stock.
Legal tender era
With the creation of
central banks, currency underwent several significant changes. During both the coinage and credit money eras the number of entities which had the ability to coin or print money was quite large. One could, literally, have "a license to print money"; many nobles had the right of coinage. Royal colonial companies, such as the Massachusetts Bay Company or the British East India Company could issue notes of credit—money backed by the promise to pay later, or exchangeable for payments owed to the company itself. This led to continual instability of the value of money. The exposure of coins to debasement and shaving, however, presented the same problem in another form: with each pair of hands a coin passed through, its value grew less.
The solution which evolved beginning in the late 18th century and through the 19th century was the creation of a central monetary authority which had a virtual monopoly on issuing currency, and whose notes had to be accepted for "all debts public and private". The creation of a truly national currency, backed by the government's store of precious metals, and enforced by their military and governmental control over an area was, in its time, extremely controversial. Advocates of the old system of
Free Banking repealed central banking laws, or slowed down the adoption of restrictions on local currency. (See
Gold standard for a fuller discussion of the creation of a standard gold based currency).
At this time both silver and gold were considered
legal tender, and accepted by governments for taxes. However, the instability in the ratio between the two grew over the course of the 19th century, with the increase both in supply of these metals, particularly silver, and of trade. This is called
bimetallism and the attempt to create a
bimetallic standard where both gold and silver backed currency remained in circulation occupied the efforts of
inflationists. Governments at this point could use currency as an instrument of policy, printing paper currency such as the United States
Greenback, to pay for military expenditures. They could also set the terms at which they'd redeem notes for specie, by limiting the amount of purchase, or the minimum amount that could be redeemed.
By 1900, most of the industrializing nations were on some form of gold standard, with paper notes and silver coins constituting the circulating medium. Governments too followed
Gresham's Law: keeping gold and silver paid, but paying out in notes.
Paper money era
A
banknote (more commonly known as a bill in the United States and Canada) is a type of currency, and commonly used as legal tender in many jurisdictions. With
coins, banknotes make up the
cash form of all modern
money.
Modern currencies
To find out which currency is used in a particular country, check
list of circulating currencies.
Currently, the
International Organization for Standardization has introduced a three-letter system of codes (
ISO 4217) to define currency (as opposed to simple names or
currency signs), in order to remove the confusion that there are dozens of currencies called the
dollar and many called the
franc. Even the
pound is used in nearly a dozen different countries, all, of course, with wildly differing values. In general, the three-letter code uses the
ISO 3166-1 country code for the first two letters and the first letter of the name of the currency (D for dollar, for instance) as the third letter.
The
International Monetary Fund uses a variant system when referring to national currencies.
» For exchange rates, see exchange rate and tables of historical exchange rates.
Local currencies
In economics, a local currency is a currency not backed by a national government, and intended to trade only in a small area. Advocates such as Jane Jacobs argue that this enables an economically depressed region to pull itself up, by giving the people living there a medium of exchange that they can use to exchange services and locally-produced goods (In a broader sense, this is the original purpose of all money.) Opponents of this concept argue that local currency creates a barrier which can interfere with economies of scale and comparative advantage, and that in some cases they can serve as a means of tax evasion.
Local currencies can also come into being when there's economic turmoil involving the national currency. An example of this is the Argentine economic crisis of 2002 in which IOUs issued by local governments quickly took on some of the characteristics of local currencies.
Accounting units
Proposed currencies
Eco - West African Monetary Zone (Gambia, Ghana, Guinea, Nigeria, Sierra Leone, possibly Liberia)
Metica - Mozambique (never implemented)
Perun - Montenegro (never implemented)
Amero - American currency union (hypothetical)
Asian Currency Unit - proposed for the ASEAN +3
East African shilling - East African Community (Burundi, Kenya, Rwanda, Tanzania, Uganda)
Khaleeji - Gulf Cooperation Council (Bahrain, Kuwait, Oman, Qatar, Saudi Arabia, United Arab Emirates)
Currency for Caribbean area- CARICOM states except the BahamasFurther Information
Get more info on 'Currency'.
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