What Is Currency?

Currency is a medium of exchange for goods and services. In short, it's money, in the form of paper or coins, usually issued by a government and generally accepted at its face value as a method of payment.

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, the virtual currency. Virtual currencies such as bitcoins have no physical existence or government backing and are traded and stored in electronic form.

Understanding Currency

Currency in some form has been in use for at least 3,000 years. Money, usually in the form of coins, proved to be crucial to facilitating trade across continents.

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 fluctuates constantly in relation to other currencies. The currency exchange market exists as a means of profiting from those fluctuations.
  • Many countries accept the U.S. dollar for payment, while others peg their currency value directly to the U.S. dollar.

A key characteristic of modern money is that it is uniformly worthless in itself. That is, bills are pieces of paper rather than coins made of gold, silver, or bronze. The concept of using paper as a currency may have been developed in China as early as 1000 BC, but the acceptance of 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.

About National Currencies

According to WorldAtlas.com, 180 national currencies recognized by the United Nations are currently in circulation. Another 66 countries either use the U.S. dollar or peg their currencies directly to the dollar.

Most countries issue their own 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.

180

The number of official currencies recognized by the United Nations.

Some countries accept the U.S. dollar as legal tender in addition to their own currencies. Costa Rica, El Salvador, and Ecuador all accept U.S. dollars. 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 airline and credit card points and Disney Dollars. These are issued by companies and are used only to pay for the products and services to which they are tied.

Currency Trading

The exchange rate is the current value of any currency in exchange for another currency. This rate fluctuates constantly in response to economic and political events.

Those fluctuations create the market for currency trading. The foreign exchange market where these trades are conducted is one of the world's largest markets in sheer volume. All trades are in large volumes, with a standard minimum lot of $100,00. Most currency traders are professionals investing for themselves or for institutional clients including banks and large corporations.

The foreign exchange market has no physical address. Trading is entirely electronic and goes on 24 hours a day to accommodate traders in every time zone.

Currency Exchange

For the rest of us, currency trading is mostly done at an airport kiosk or a bank while traveling.

Consumer advocates say that travelers get the best value by exchanging cash at a bank or at an in-network ATM. Other options may have higher fees and poor exchange rates.