Currency

For other uses, seeCurrency (disambiguation).

Acurrencyis a standardization ofmoneyin any form, in use orcirculationas amedium of exchange,for examplebanknotesandcoins.A more general definition is that a currency is asystem of moneyin common use within a specific environment over time, especially for people in a nation state.Under this definition, theBritish Pound sterling(£),euros(€),Japanese yen(¥), andU.S. dollars(US$) are examples of (government-issued)fiat currencies.Currencies may act asstores of valueand be traded between nations inforeign exchange markets,which determine the relative values of the different currencies.Currencies in this sense are either chosen by users or decreed by governments, and each type has limited boundaries of acceptance; i.e.,legal tenderlaws may require a particular unit of account forpaymentstogovernmentagencies.

Other definitions of the termcurrencyappear in the respective synonymous articles:banknote,coin,andmoney.This article uses the definition which focuses on the currency systems of countries.

One can classify currencies into threemonetary systems:fiat money,commodity money,andrepresentative money,depending on what guarantees a currency's value (theeconomyat large vs. the government'sprecious metal reserves). Some currencies function aslegal tenderin certainjurisdictions,or for specific purposes, such as payment to a government (taxes), or government agencies (fees, fines). Others simply get traded for their economic value.

The concept of adigital currencyhas arisen in recent years. Whether government-backed digital notes and coins (such as thedigital renminbiin China, for example) will be successfully developed and implemented remains unknown.Digital currencies that are not issued by a governmentmonetary authority,such ascryptocurrencieslikeBitcoin,are different because their value is market-dependent and has nosafety net.Various countries have expressed concern about the opportunities that cryptocurrencies create for illegal activities such asscams,ransomware(extortion),money launderingandterrorism.In 2014, the United StatesIRSadvised that virtual currency is treated aspropertyfor federalincome-taxpurposes, and it provides examples of how long-standing tax principles applicable to transactions involving property apply to virtual currency.

History

Early currency

Cowry shells being used as money by an Arab trader

Originally, currency was a form of receipt, representing grain stored in temple granaries inSumerin ancientMesopotamiaand inAncient Egypt.

In this first stage of currency, metals were used as symbols to represent value stored in the form of commodities. This formed the basis of trade in theFertile Crescentfor over 1500 years. However, thecollapse of the Near Eastern trading systempointed 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. A trade could only reach as far as the credibility of that military. By the lateBronze Age,however, a series oftreatieshad established safe passage for merchants around theEastern Mediterranean,spreading fromMinoanCreteandMycenaein the northwest toElamandBahrainin the southeast. It is not known what was used as a currency for these exchanges, but it is thought thatoxhide-shaped ingotsof copper, produced inCyprus,may have functioned as a currency.

It is thought that the increase in piracy and raiding associated with theBronze Age collapse,possibly produced by thePeoples of the Sea,brought the trading system of oxhide ingots to an end. It was only the recovery of Phoenician trade in the 10th and 9th centuries BC that led to a return to prosperity, and the appearance of real coinage, possibly first in Anatolia withCroesusofLydiaand 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, themanilla currency,shell money,and ochre and other earth oxides. The manilla rings ofWest Africawere one of the currencies used from the 15th century onwards to sell slaves.African currencyis still notable for its variety, and in many places, various forms ofbarterstill apply.

Coinage

Main article:Coin

The prevalence of metal coins possibly led to the metal itself being the store of value: first copper, then both silver and gold, and at one point also bronze. Today other non-precious metals are used for coins. Metals were mined, weighed, and stamped into coins. This was to assure the individual accepting the coin that he was getting a certain known weight of precious metal. Coins could be counterfeited, but the existence of standard coins also created a newunit of account,which helped lead tobanking.Archimedes' principleprovided the next link: coins could now be easily tested for theirfineweight of the metal, and thus the value of a coin could be determined, even if it had been shaved, debased or otherwise tampered with (seeNumismatics).

The world's oldest coin, created in the ancient Kingdom of Lydia

Most major economies using coinage had several tiers of coins of different values, made of copper, silver, and gold. Gold coins were the most valuable and were used for large purchases, payment of the military, and backing of state activities. Units of account were often defined as the value of a particular type of gold coin. Silver coins were used for midsized transactions, and sometimes also defined a unit of account, while coins of copper or silver, or some mixture of them (seedebasement), might be used for everyday transactions. This system had been used in ancientIndiasince the time of theMahajanapadas.The exact ratios between the values of the three metals varied greatly between different eras and places; for example, the opening of silver mines in theHarzmountains of central Europe made silver relatively less valuable, as did the flood ofNew Worldsilverafter the Spanish conquests.However, the rarity of gold consistently made it more valuable than silver, and likewise silver was consistently worth more than copper.

Paper money

Main article:Banknote

Inpremodern China,the need for lending and for a medium of exchange that was less physically cumbersome than large numbers ofcoppercoins led to the introduction ofpaper money,i.e.banknotes.Their introduction was a gradual process that lasted from the lateTang dynasty(618–907) into theSong dynasty(960–1279). It began as a means for merchants to exchange heavy coinage forreceiptsof deposit issued aspromissory notesbywholesalers' shops. These notes were valid for temporary use in a small regional territory. In the 10th century, theSong dynastygovernment began to circulate these notes amongst the traders in itsmonopolizedsalt industry. The Song government granted several shops the 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 only locally and temporarily valid: it was not until the mid 13th century that a standard and uniform government issue of paper money became an acceptable nationwide currency. The already widespread methods ofwoodblock printingand thenBi Sheng'smovable typeprintingby the 11th century were the impetus for the mass production of paper money in premodern China.

Song dynastyJiaozi,the world's earliest paper money

At around the same time in themedieval Islamic world,a vigorousmonetary economywas created during the 7th–12th centuries on the basis of the expanding levels of circulation of a stable high-value currency (thedinar). Innovations introduced by Muslim economists, traders and merchants include the earliest uses ofcredit,cheques,promissory notes,savings accounts,transaction accounts,loaning,trusts,exchange rates,the transfer of credit anddebt,andbanking institutionsfor loans anddeposits.

In Europe, paper currency was first introduced on a regular basis inSwedenin 1661 (althoughWashington Irvingrecords an earlier emergency use of it, by the Spanish in a siege during theConquest of Granada). AsSwedenwas rich in copper, many copper coins were in circulation, but its relatively low value necessitated extraordinarily big coins, often weighing several kilograms.

The advantages of paper currency were numerous: it reduced the need to transport gold and silver, which was risky; it facilitated loans of gold or silver at interest, since the underlyingspecie(money in the form of gold or silver coins rather than notes) never left the possession of the lender until someone else redeemed the note; and it allowed a division of currency into credit- and specie-backed forms. It enabled the sale ofinvestmentinjoint-stock companiesand the redemption of thosesharesin a paper.

But there were also disadvantages. First, since a note has no intrinsic value, there was nothing to stop issuing authorities from printing more notes than they had specie to back them with. Second, because this increased the money supply, it increased inflationary pressures, a fact observed byDavid Humein the 18th century. Thus 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 astanding 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 establishedmintsto print money and mint coins, and branches of their treasury to collect taxes and hold gold and silver stock.

At that time, both silver and gold were considered alegal tenderand accepted by governments for taxes. However, theinstability in the exchange ratebetween the two grew over the course of the 19th century, with the increases both in the supply of these metals, particularly silver, and in trade. The parallel use of both metals is calledbimetallism,and the attempt to create abimetallicstandard where both gold and silver backed currency remained in circulation occupied the efforts ofinflationists.Governments at this point could use currency as an instrument of policy, printing paper currency such as the United Statesgreenback,to pay for military expenditures. They could also set the terms at which they would 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 ofgold standard,with paper notes and silver coins constituting the circulating medium. Privatebanksand governments across the world followedGresham's law:keeping the gold and silver they received but paying out in notes. This did not happen all around the world at the same time, but occurred sporadically, generally in times of war or financial crisis, beginning in the early 20th century and continuing across the world until the late 20th century, when the regime of floating fiat currencies came into force. One of the last countries to break away from the gold standard was the United States in 1971, an action which was known as theNixon shock.No country has an enforceable gold standard orsilver standardcurrency system.

Banknote era

Main articles:BanknoteandFiat currency

Abanknoteor a bill is a type of currency and it is commonly used as legal tender in many jurisdictions. Together withcoins,banknotes make up thecashform of a currency. Banknotes were initially mostly paper, but Australia'sCommonwealth Scientific and Industrial Research Organisationdeveloped apolymer currencyin the 1980s; it went into circulation on the nation's bicentenary in 1988.Polymer banknoteshad already been introducedin theIsle of Manin 1983. As of 2016,polymer currencyis used in over 20 countries (over 40 if counting commemorative issues),and dramatically increases the life span of banknotes and reduces counterfeiting.

Modern currencies

Name of currency units by country, in Portuguese

Further information:Tables of historical exchange rates to the United States dollar

For a list of which currency or currencies are used by present-day countries or regions, seeList of circulating currencies.

The currency used is based on the concept oflex monetae;that a sovereign state decides which currency it shall use. (SeeFiat currency.)

Currency codes and currency symbols

Main articles:List of currency codesandList of currency symbols

In 1978 theInternational Organization for Standardizationpublished a system of three-digit alphabetic codes (ISO 4217) to denote currencies. These codes are based on two initial letters allocated to a specific country and a final letter denoting a specific monetary unit of account.

Many currencies use acurrency symbol.These are not subject to international standards and are not unique: thedollar signin particular has many uses.

Alternative currencies

Main article:Alternative currency

Further information:Cryptocurrency bubble

Distinct from centrally controlled government-issued currencies, private decentralized trust-reduced networks support alternative currencies (such asBitcoinandEthereum's ether,which are classified ascryptocurrencysincetransferencetransactions are assured throughcryptographic signaturesvalidated by all users. Withfew exceptions,these currencies are notasset backed.TheU.S. Commodity Futures Trading Commissionhas declared Bitcoin (and, by extension, similar products) to be a commodity under theCommodity Exchange Act.

There are alsobrandedcurrencies, for example 'obligation' based stores of value, such as quasi-regulated BarterCard, Loyalty Points (Credit Cards, Airlines) or Game-Credits (MMO games) that are based on reputation of commercial products.

Historically, pseudo-currencies have also includedcompany scrip,a form of wages that could only be exchanged incompany storesowned by the employers. Moderntoken money,such as the tokens operated bylocal exchange trading systems(LETS), is a form of barter rather than being a true currency.

The currency may be Internet-based and digital, for instance,Bitcoinis not tied to any specific country, or the IMF's SDR that is based on a basket of currencies (and assets held).

Possession and sale of alternative forms of currencies is often outlawed by governments in order to preserve the legitimacy of the constitutional currency for the benefit of all citizens. For example, Article I, section 8, clause 5 of the United States Constitution delegates toCongressthe power to coin money and to regulate the value thereof. This power was delegated to Congress in order to establish and preserve a uniform standard of value and to insure a singular monetary system for all purchases and debts in the United States, public and private. Along with the power to coin money, the United States Congress has the concurrent power to restrain the circulation of money which is not issued under its own authority in order to protect and preserve the constitutional currency. It is a violation of federal law for individuals, or organizations to create private coin or currency systems to compete with the official coinage and currency of the United States.

Control and production

A list of exchange rates for various base currencies given by amoney changerin Thailand, with the Thailand Baht as the counter (or quote) currency. Note the Korean currency code should be KRW.

Most traded currencies by value
Currency distribution of global foreign exchange market turnover

Rank	Currency	ISO 4217 code	Symbolor abbreviation	Proportion of daily volume		Change (2019–2022)
				April 2019	April 2022
1	U.S. dollar	USD	US$	88.3%	88.5%	0.2pp
2	Euro	EUR	€	32.3%	30.5%	1.8pp
3	Japanese yen	JPY	¥ /Viên	16.8%	16.7%	0.1pp
4	Sterling	GBP	£	12.8%	12.9%	0.1pp
5	Renminbi	CNY	¥ /Nguyên	4.3%	7.0%	2.7pp
6	Australian dollar	AUD	A$	6.8%	6.4%	0.4pp
7	Canadian dollar	CAD	C$	5.0%	6.2%	1.2pp
8	Swiss franc	CHF	CHF	4.9%	5.2%	0.3pp
9	Hong Kong dollar	HKD	HK$	3.5%	2.6%	0.9pp
10	Singapore dollar	SGD	S$	1.8%	2.4%	0.6pp
11	Swedish krona	SEK	kr	2.0%	2.2%	0.2pp
12	South Korean won	KRW	₩ /원	2.0%	1.9%	0.1pp
13	Norwegian krone	NOK	kr	1.8%	1.7%	0.1pp
14	New Zealand dollar	NZD	NZ$	2.1%	1.7%	0.4pp
15	Indian rupee	INR	₹	1.7%	1.6%	0.1pp
16	Mexican peso	MXN	MX$	1.7%	1.5%	0.2pp
17	New Taiwan dollar	TWD	NT$	0.9%	1.1%	0.2pp
18	South African rand	ZAR	R	1.1%	1.0%	0.1pp
19	Brazilian real	BRL	R$	1.1%	0.9%	0.2pp
20	Danish krone	DKK	kr	0.6%	0.7%	0.1pp
21	Polish złoty	PLN	zł	0.6%	0.7%	0.1pp
22	Thai baht	THB	฿	0.5%	0.4%	0.1pp
23	Israeli new shekel	ILS	₪	0.3%	0.4%	0.1pp
24	Indonesian rupiah	IDR	Rp	0.4%	0.4%
25	Czech koruna	CZK	Kč	0.4%	0.4%
26	UAE dirham	AED	د.إ	0.2%	0.4%	0.2pp
27	Turkish lira	TRY	₺	1.1%	0.4%	0.7pp
28	Hungarian forint	HUF	Ft	0.4%	0.3%	0.1pp
29	Chilean peso	CLP	CLP$	0.3%	0.3%
30	Saudi riyal	SAR	﷼	0.2%	0.2%
31	Philippine peso	PHP	₱	0.3%	0.2%	0.1pp
32	Malaysian ringgit	MYR	RM	0.2%	0.2%
33	Colombian peso	COP	COL$	0.2%	0.2%
34	Russian ruble	RUB	₽	1.1%	0.2%	0.9pp
35	Romanian leu	RON	L	0.1%	0.1%
36	Peruvian sol	PEN	S/	0.1%	0.1%
37	Bahraini dinar	BHD	.د.ب	0.0%	0.0%
38	Bulgarian lev	BGN	BGN	0.0%	0.0%
39	Argentine peso	ARS	ARG$	0.1%	0.0%	0.1pp
…	Other			1.8%	2.3%	0.5pp
Total				200.0%	200.0%

Commonly acentral bankhas the exclusive power to issue all forms of currency, including coins and banknotes (fiat money), and to restrain the circulation alternative currencies for its own area of circulation (a country or group of countries); it regulates the production of currency by banks (credit) throughmonetary policy.

Anexchange rateis a price at which two currencies can be exchanged against each other. This is used fortradebetween the two currency zones. Exchange rates can be classified as eitherfloatingorfixed.In the former, day-to-day movements in exchange rates are determined by the market; in the latter, governments intervene in the market to buy or sell their currency to balance supply and demand at a static exchange rate.

In cases where a country has control of its own currency, that control is exercised either by acentral bankor by aMinistry of Finance.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. A monetary authority is created and supported by its sponsoring government, so independence can be reduced by the legislative or executive authority that creates it.

Several countries can use the same name for their own separate currencies (for example, adollarinAustralia,Canada,and theUnited States). By contrast, several countries can also use the same currency (for example, theeuroor theCFA franc), or one country can declare the currency of another country to belegal tender.For example,PanamaandEl Salvadorhave declared US currency to be legal tender, and from 1791 to 1857,Spanish dollarswere legal tender in the United States. At various times countries have either re-stamped foreign coins or usedcurrency boards,issuing one note of currency for each note of a foreign government held, asEcuadorcurrently does.

Each currency typically has a main currency unit (thedollar,for example, or theeuro) and a fractional unit, often defined as1⁄100of the main unit: 100cents= 1dollar,100centimes= 1franc,100 pence = 1pound,although units of1⁄10or1⁄1000occasionally also occur. Some currencies do not have any smaller units at all, such as theIcelandic krónaand theJapanese yen.

MauritaniaandMadagascarare the only remaining countries that have theoretical fractional units not based on the decimal system; instead, theMauritanian ouguiyais in theory divided into 5khoums,while theMalagasy ariaryis theoretically divided into 5iraimbilanja.In these countries, words likedollarorpound"were simply names for given weights of gold".Due toinflationkhoums and iraimbilanja have in practice fallen into disuse. (Seenon-decimal currenciesfor other historic currencies with non-decimal divisions.)

Currency convertibility

Subject to variation around the world, local currency can be converted to another currency or vice versa with or without central bank/government intervention. Such conversions take place in theforeign exchange market.Based on the above restrictions or free and readily conversion features, currencies are classified as:

Fully convertible

When there are no restrictions or limitations on the amount of currency that can be traded on the international market, and the government does not artificially impose a fixed value or minimum value on the currency in international trade. The US dollar is one of the main fully convertible currencies.

Partially convertible

Central banks control international investments flowing into and out of a country. While most domestic transactions are handled without any special requirements, there are significant restrictions on international investing, and special approval is often required in order to convert into other currencies. The Indian rupee and the renminbi are examples of partially convertible currencies.

Nonconvertible

A government neither participates in the international currency market nor allows the conversion of its currency by individuals or companies. These currencies are also known asblocked,e.g. theNorth Korean wonand theCuban peso.

According to the three aspects of trade ingoods and services,capital flows and national policies, the supply-demand relationship of different currencies determines the exchange ratio between currencies.

Trade in goods and services

Through cost transfer, goods and services circulating in the country (such as hotels, tourism, catering, advertising, household services) will indirectly affect the trade cost of goods and services and the price of export trade. Therefore, services and goods involved ininternational tradeare not the only reason affecting the exchange rate. The large number of international tourists and overseas students has resulted in the flow of services and goods at home and abroad. It also represents that the competitiveness of global goods and services directly affects the change of international exchange rates.

Capital flows

National currencies will be traded on international markets for investment purposes. Investment opportunities in each country attract other countries into investment programs, so that these foreign currencies become the reserves of thecentral banksof each country. The exchange rate mechanism, in which currencies are quoted continuously between countries, is based on foreign exchange markets in which currencies are invested by individuals and traded or speculated by central banks and investment institutions. In addition, changes in interest rates, capital market fluctuations and changes in investment opportunities will affect the global capital inflows and outflows of countries around the world, and exchange rates will fluctuate accordingly.

National policies

The country's foreign trade, monetary and fiscal policies affect the exchange rate fluctuations. Foreign trade includes policies such as tariffs and import standards for commodity exports. The impact ofmonetary policyon the total amount and yield of money directly determines the changes in the international exchange rate.Fiscal policies,such as transfer payments, taxation ratios, and other factors, dominate the profitability of capital and economic development, and the ratio of national debt issuance to deficit determines the repayment capacity and credit rating of the country. Such policies determine the mechanism of linking domestic and foreign currencies and therefore have a significant impact on the generation of exchange rates.

Currency convertibility is closely linked to economic development and finance. There are strict conditions for countries to achieve currency convertibility, which is a good way for countries to improve their economies. The currencies of some countries or regions in the world are freely convertible, such as the US dollar, Australian dollar and Japanese yen. The requirements for currency convertibility can be roughly divided into four parts:

Sound microeconomic agency

With a freely convertible currency, domestic firms will have to compete fiercely with their foreign counterparts. The development of competition among them will affect the implementation effect of currency convertibility. In addition, microeconomics is a prerequisite for macroeconomic conditions.

The macroeconomic situation and policies are stable

Since currency convertibility is the cross-border flow of goods and capital, it will have an impact on the macro economy. This requires that the national economy be in a normal and orderly state, that is, there is no serious inflation and economic overheating. In addition, the government should use macro policies to make mature adjustments to deal with the impact of currency exchange on the economy.

A reasonable and open economy

The maintainability of international balance of payments is the main performance of reasonable economic structure. Currency convertibility not only causes difficulties in the sustainability of international balance of payments but also affects the government's direct control over international economic transactions. To eliminate the foreign exchange shortage, the government needs adequate international reserves.

Appropriate exchange rate regime and level

The level of exchange rate is an important factor in maintaining exchange rate stability, both before and after currency convertibility. The exchange rate of freely convertible currency is too high or too low, which can easily trigger speculation and undermine the stability of macroeconomic and financial markets. Therefore, to maintain the level of exchange rate, a proper exchange rate regime is crucial.

Local currency

Main article:Local currency

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 asJane Jacobsargue 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 that can interfere witheconomies of scaleand comparative advantage and that in some cases they can serve as a means oftax 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 whichIOUsissued by local governments quickly took on some of the characteristics of local currencies.

One of the best examples of a local currency is the originalLETScurrency, founded on Vancouver Island in the early 1980s. In 1982, theCanadian Central Bank's lending rates ran up to 14% which drove chartered bank lending rates as high as 19%. The resulting currency and credit scarcity left island residents with few options other than to create a local currency.

List of major world payment currencies

The following table are estimates of the 20 most frequently used currencies in world payments in June 2024 bySWIFT.

20 major currencies in world payments (in % of world)

Rank	Currency	June 2024
	World	100.00%
1	United States dollar	47.08%
2	Euro	22.72%
3	Pound sterling	7.08%
4	Chinese renminbi	4.61%
5	Japanese yen	3.75%
6	Canadian dollar	2.61%
7	Australian dollar	1.76%
8	Hong Kong dollar	1.60%
9	Singapore dollar	1.28%
10	Swiss franc	1.09%
11	Swedish krona	0.85%
12	Norwegian krone	0.78%
13	Polish złoty	0.72%
14	Thai baht	0.42%
15	Danish krone	0.37%
16	Mexican peso	0.36%
17	New Zealand dollar	0.35%
18	South African rand	0.31%
19	Hungarian forint	0.26%
20	Philippine peso	0.24%

See also

Related concepts

• Counterfeit money
• Currency band
• Currency transaction tax
• Debasement
• Exchange rate
• Fiscal localism
• Foreign currency exchange
• Foreign exchange reserves
• Functional currency
• History of banking
• History of money
• Mutilated currency
• Optimum currency area
• Slang terms for money
• Virtual currency
• World currency

Accounting units

• Currency pair
• Currency symbol
• Currency strength
• European Currency Unit
• Fictional currency
• Franc Poincaré
• Local currencies
• Petrocurrency
• Special drawing rights

Lists

• ISO 4217
• List of alternative names for currency
• List of currencies
• List of circulating currencies
• List of proposed currencies
• List of historical currencies
• List of historical exchange rates
• List of international trade topics
• List of motifs on banknotes

External links

• Media related toCurrencyat Wikimedia Commons
• Quotations related toCurrencyat Wikiquote
• CurrencyatCurlie