Currency

What is 'Currency'

Currency is a generally accepted form of money, including coins and paper notes, which is issued by a government and circulated within an economy. Used as a medium of exchange for goods and services, currency is the basis for trade.

BREAKING DOWN 'Currency'

Generally speaking, each country has its own currency. For example, Switzerland's official currency is the Swiss franc, and Japan's official currency is the yen. An exception would be the euro, which is used as the currency for several European countries. While these currencies can be specific to a nation, other countries have declared foreign currency to be legal tender in their own country. For example, El Salvador and Panama allow the use of the U.S. dollar as legal tender, and immediately after the founding of the U.S. mint in 1792, U.S. residents used Spanish coins because they were heavier.

Some currencies, like cryptocurrencies​, bitcoin​, dogecoin​ and other online currencies and branded currencies are not tied to any country. Branded currencies, like airline and credit card points, or in-game credits are valued in relationship to the value of the products or services they’re tied to. Control over digital currencies is entirely decentralized, and the exchange rate of a digital currency can vary widely in a short period of time. 

Local currencies are currencies intended for trade over a small area and aren’t nationally backed. There are a wide variety of local currencies within the United States, which itself has a history of local currencies before the establishment of state and national banks. Other instances in which local currencies have been used include a kind of quasi local currency in the form of local government IOUs that have been used as currency. 

In most all cases, the central bank of a country has the sole right to issue money for circulation. Along with a main unit of currency, these banks issue fractional units, usually in the form of coins. These usually show up as 1/100th, and 1/4th, but can at times be as small as 1/1000th of the main unit of currency.

Investors often trade currency on the foreign exchange market, which is one of the most heavily traded markets in the world. An exchange rate is the rate at which two currencies can be exchanged against each other. These rates can be ‘floating’ or ‘fixed’; floating being that the value of the currency changes in relationship to foreign exchange market mechanisms, fixed currency is currency tied to another currency like gold or a currency basket.

Most currencies, like the U.S. dollar can be traded (or converted) for another currency in a money market. Individuals, like international tourists, who want to trade hard currency usually do so at an exchange window or at a bank without any restriction or artificially imposed fixed value. These currencies are considered fully convertible. Partially convertible currencies are currencies that a central bank controls. Central banks sometimes do this to control hot money flows and international investment. Non-convertible currencies are currencies that don’t participate in the foreign exchange market and aren’t allowed to be converted.