What Is Currency?
Currency is a medium of exchange for goods and services. In short, it’s money, in the form of paper and coins, usually issued by a government and generally accepted at its face value as a payment method.
Currency is the primary medium of exchange in the modern world, having long ago replaced bartering as a means of trading goods and services.
In the 21st century, a new form of currency has entered the vocabulary and realm of exchange: virtual currency, also known as cryptocurrency. Virtual currencies, such as Bitcoin and Ethereum, have no physical form or government backing in the United States. They are traded and stored electronically.
KEY TAKEAWAYS
- Currency is a generally accepted form of payment usually issued by a government and circulated within its jurisdiction.
- The value of any currency constantly fluctuates among other currencies.
- Currency is a tangible form of money, an intangible value system.
- Many countries accept the U.S. dollar for payment, while others peg their currency value directly to the U.S. dollar.
- Cryptocurrency is a 21st-century innovation and exists only electronically.
Understanding Currency
Currency in some form has been in use for at least 3,000 years. At one time, only in the form of coins, currency was crucial to facilitating trade across continents.
A key characteristic of modern currency is that it is worthless. That is, bills are pieces of paper rather than coins made of gold, silver, or bronze.
Using paper as a currency may have been developed in China as early as 1000 BC, but accepting a piece of paper in return for something of real value took a long time to catch on. Modern currencies are issued on paper in various denominations, with fractional issues in the form of coins.
Money vs. Currency
The terms money and currency are often thought to mean the same thing. However, while related, they have different meanings.
Money is a broader term that refers to an intangible system of value that makes the exchange of goods and services possible, now and in the future. Currency is simply one tangible form of money.
Money is used in various ways for future use in duplicate transactions. For example, money is a store of value. It has and maintains a particular value that supports ongoing exchanges. People know that the money they received today will have the same value next week when they need to purchase or pay a bill.
Money is also referred to as a unit of account. That means it can be used to account for changes in the value of items over time. Businesses use money as a unit of account when they prepare a budget or give assets a value. Profits and losses are established and relied upon using money as a unit of account.
Money also has specific properties that allow for the smooth exchange of goods:
- It is fungible or exchangeable, so it doesn’t need to be re-valued for every transaction.
- It is durable, so it lasts for many exchanges over time.
- It is convenient to carry and divide.
- It is recognizable so that people can trust it and confidently complete their exchanges of goods and services.
- The supply of money should be stable so that its value is reliable.
They understand what money is, clarifying the meaning of currency. It’s a form of money used every day by people all over the world. Checks are another form of money (known as money substitutes). Cigarettes have even been a form of money, as they were for soldiers during the Second World War.
Fast Fact
The Bureau of Engraving and Printing is responsible for printing America’s paper currency. Its parent agency is the U.S. Dept. of the Treasury.4 The U.S. Mint, founded in 1792, is “the nation’s sole manufacturer of legal tender coinage and is responsible for producing circulating coinage for the nation to conduct its trade and commerce.”
Types of Currency
The United States Mint defines currency as money in the form of paper and coins used as a medium of exchange.6 Currencies are created and distributed by individual countries around the world.
The Bureau of Engraving and Printing issues U.S. currency in paper form as $1, $2, $5, $10, $20, $50, and $100 bills. The $500, $1,000, $5,000, and $10,000 bills are no longer issued, but those still in circulation are redeemable at total face value. Currency issued in 1861 or earlier is no longer valid and would not be redeemable at total face value.
The Mint issues U.S. currency in the form of coins in denominations of 1¢, 5¢, 10¢, 25¢, 50¢, and $1.7
There are over 200 national currencies currently in circulation. Including the U.S., 42 countries use the U.S. dollar or peg their currencies directly to it. According to the International Monetary Fund (IMF) the dollar makes up 58.8% of the foreign exchange reserves.
Most countries issue their currencies. For example, Switzerland’s official currency is the Swiss franc, and Japan’s is the yen. An exception is the Euro, which has been adopted by most countries that are members of the European Union.
Some countries, like the Bahamas, Zimbabwe, and Panama, accept the U.S. dollar as legal tender in addition to their currencies. For some time after the founding of the U.S. Mint in 1792, Americans continued to use Spanish coins because they were heavier and presumably felt more valuable.
There are also branded currencies, like an airline, credit card points, and Disney Dollars. These are issued by companies and are used only to pay for the products and services they are tied to.
Currency Trading
The exchange rate is the current value of any currency relative to another currency. As a result, rates are quoted for currency pairs, such as the EUR/USD (euro to U.S. dollar). Exchange rates constantly fluctuate in response to economic and political events.
These fluctuations create a market for currency trading. Based on sheer volume, the foreign exchange market where these trades are conducted is one of the world’s largest markets. All trades are in large volumes, with a standard minimum lot of 100,000. Most currency traders are professionals investing for themselves or institutional clients, including banks and large corporations.
The foreign exchange market has no physical address. Trading is entirely electronic and lasts 24 hours daily to accommodate traders in every time zone.
For the rest of us, currency exchange is typically done at an airport kiosk or a bank before we go on a trip or while traveling.
Consumer advocates say travelers get the best value by exchanging cash at a bank or an in-network ATM. Other options may have higher fees and unattractive exchange rates.
What Does Currency Mean?
The term currency refers to the tangible form of money: paper bills and coins. It’s used as a medium of exchange that’s accepted at face value for products and services as well as for savings and the payment of debt.
What’s an Example of Currency?
One example of currency is any U.S. paper bills you may have physically. It is any coins the U.S. issues, such as the penny, nickel, and quarter. Currency can also be paper bills and coins issued by the governments of other countries across the globe.
What’s the Difference Between Money and Currency?
Money is an intangible system of value that provides the means for the ongoing exchange of goods and services in a society. Money has taken many forms since it overtook the system of bartering. Currency is a tangible form of it. So, instead of bartering agricultural produce for the clothing, you may need, you can use currency (paper notes and coins) to obtain it.
