The term “currency” refers to several closely linked concepts in the financial area, with the most common one being a system of money used as a medium of exchange for products in a particular country or region in a particular period of time. Currency in its traditional sense is issued by the government in the forms of banknotes and coins and utilized by citizens for payments. It also serves as a type of asset and might be traded in the foreign exchange market.
History of Currency
Currency has appeared a long time ago as a replacement for a less convenient way of barter, for currency being more suitable for setting acceptable prices during a trade than matching different goods and services to be exchanged. Different objects like copper slabs and other similar things are believed by the historians to be used as currencies in the ancient world, although more traditional forms like coins have quickly replaced them after its invention.
Paper as a form of currency appeared in China about 1500 years ago, but it took a while for it to become a prevailing form of actual money. As a currency in the form of paper money has actually no real value by itself and is rather easy to produce, there were a number of problems connected with it, such as a high risk of inflation in case of excess money issuing or counterfeiting, but at the same time paper money provided too many economical possibilities to be dismissed, and by the end of 20th century the most common physical representation of currency are paper and polymer banknotes.
In the 21st century, a new type of currency has appeared, the key features of which are the absence of physical representation and no government support for it. This type of currency is called a virtual currency, and it’s traded in electronic form.
Main principles of Currency use
As most common modern currencies are fiat currencies, which means that they are not backed by real commodities such as precious metals, but instead of it their value is proclaimed by the government in a special decree. So, this legal acknowledgement by the government is vital for the use of the national currency, otherwise it has no real value. Other monetary systems also exist, including commodity money, which is valuable by itself, or representative money, which is backed by commodities, but most popular currencies like dollars, euros, pounds sterling are all fiat currencies.
All forms of currencies used in a government are issued by the central bank, which has an unshared right to do so. It also regulates the use of any other currencies, if it is allowed in a given country. It’s important to know that it’s possible for another country’s currency to be allowed as a legal equivalent in some countries, as it is done for the US dollar in Panama, though it’s not a typical situation. There are also cases when one currency is used in different countries, for instance, the euro.
One more essential point worth mentioning is that there are several currencies sharing similar names which are separate and utilized in different countries. A good example of this is the dollar, which might be the Australian dollar, the US dollar or the Canadian dollar, with all three of them being separate currencies. To avoid confusing and difficulties, a special system of coding was presented by the International Organization of Standardization. This standard is called ISO 4217, and it is widely used internationally by most financial organizations and in the press, as it sometimes appears more convenient than translated names or symbols. According to it, a three-letter code is given to each currency, with the first two letters being a country code by the ISO 3166-1 standard, and the last one being the first letter of the currency name. For example, a code for the Japanese yen is JPY. In some cases, the first two letters might represent an alternative country name, which is used more often, like in the code for the British pound, which is GBP.
All in all, nowadays, there are about a little less than 200 currencies used in different countries which are recognized by the United Nations.
Foreign exchange trading
As different countries use different currencies, there is always a need to exchange them for individuals travelling from country to country, but the foreign exchange market also provides a huge possibility to gain profits by trading currencies. The value of a currency at a given moment is called an exchange rate, and these rates for different currencies changes regularly as a result of current economical and political events, opening prospects for lucrative trading.
Currency trading in huge amounts is organized via foreign exchange markets, which altogether represents one of the hugest markets in the world in volume. Currencies are traded in pairs, and this trading happens online and goes all day and night long without interruptions to unite all the participants around the world. The participants of the market are traditionally professional traders.