Business, Legal & Accounting Glossary
Currency is money (coins and paper) used to buy goods and services. A broader definition is that money is a claim on human work.
Currency is a form of money which serves as the primary means of exchange in a society, community, or country.
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. Currencies are the dominant medium of exchange. Coins and paper money are both forms of currency.
Like any other item of value:
Another perspective: Money is a claim on human labor. There is a finite amount of work available on the planet, and our money supply represents a constant claim on that work, past, present and future.
Most currency in existence today is fiat currency: it is worth something because we say it is so. It is no longer backed by anything other than the government credit that was used to create it. Money used to be pegged against a particular weight of gold or silver. This is referred to as the gold standard.
In days gone by, most currency was based on precious metals like gold or silver. The US government once issued Gold Certificates and Silver Certificates as paper currency which were convertible to gold or silver (species) on demand. Gold was exchanged at the fixed rate of $35/oz. Contracts once had clauses that required payment of debt in gold. The US withdrew gold from circulation in the 1930s and cancelled all gold clauses. The US abandoned the fixed exchange rate and floated the dollar in 1970. Today US currency is Federal Reserve Notes. The dollar is backed by the full faith and credit of the US government but has no other backing. The exchange rate of most currencies now varies with supply and demand on currency exchanges. A few countries like South Korea maintain a fixed exchange rate with the US dollar, but most do not.
Since fiat money is only worth what we agree that it is worth as a society, it has little inherent value (it can’t be eaten, or used to build microchips or bicycles). If money is restricted to a particularly scarce and unchanging resource like gold, it can’t change value much over time. Fiat money, however, increases over time as the banks that create it make more and more. As the amount of money increases in an economy in relation to the amount of work and resources available, you get inflation. Inflation makes every existing dollar worth less in relation to the economy’s work product. This is why a movie ticket you bought for $6 in the 1980s cost $10 in the 2000s.
Inflation is similar to the idea that a share split does not affect the underlying value of a company. This presentation has a great explanation of money and money creation
In most cases, each private central bank has monopoly control over the supply and production of its own currency. To facilitate trade between these 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 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 oversight by 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 is not likely. In almost all Western countries, the monetary authority is largely independent from the government.
Several countries can use the same name for their own distinct currencies (e.g., the dollar in Canada and the United States). By contrast, several countries can also use the same currency (e.g., the euro), or one 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.
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.
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 List of countries using pound currency|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. United States currency, for instance, is globally referred to as USD.
The International Monetary Fund uses a variant system when referring to national 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 is economic turmoil involving the national currency. An example of this is the Argentinian economic crisis of 2002 in which IOUs issued by local governments quickly took on some of the characteristics of local currencies.
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This glossary post was last updated: 4th August, 2021 | 7 Views.