Difference between revisions of "Currency" - New World Encyclopedia

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[[Category:Politics and social sciences]]
 
[[Category:Politics and social sciences]]
 
[[Category:Economics]]
 
[[Category:Economics]]
  
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[[Image:Moneybillscoins3.jpg|right|thumb|250px|Various denominations of [[money]] used in different countries]]
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A '''currency''' is a [[Medium of exchange|unit of exchange]], facilitating the [[trade|transfer]] of [[consumer good|goods]] and [[services]]. It is one form of [[money]], where money is anything that serves as a medium of exchange, a [[store of value]], and a standard of value. Historically, currencies have developed items considered valuable such as [[shell]]s, or [[cattle]], to the use of precious [[metal]]s first in forms such as ingots and later [[coin]]s, and then to credit and paper money. Fiat money removes the concept of money as a commodity, guaranteeing that it has the value stated on it. There are also privately issued currencies that may be redeemed only by those who produce them.
  
A '''currency''' is a [[Medium of exchange|unit of exchange]], facilitating the [[trade|transfer]] of [[goods and services]]. It is one form of [[money]], where money is anything that serves as a medium of exchange, a [[store of value]], and a standard of value. A currency zone is a country or region in which a specific currency is the dominant medium of exchange. To facilitate [[international trade|trade]] between currency zones, there are [[exchange rate]]s, which are the prices at which currencies (and the goods and services of individual currency zones) can be exchanged against each other. Currencies can be classified as either [[floating currency|floating currencies]] or [[fixed currency|fixed currencies]] based on their [[exchange rate regime]]. In common usage, ''currency'' sometimes refers to only paper money, as in ''coins and currency'', but this is misleading. Coins and paper money are both forms of currency.
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In most cases, each [[country]] has [[monopoly]] control over the supply and production of its own currency, usually through a [[central bank]]. Member countries of the [[European Union]]'s [[Economic and Monetary Union of the European Union|Economic and Monetary Union]] are a notable exception to this rule, as they have ceded control of [[monetary policy]] to the [[European Central Bank]] and accept the [[Euro]] as their common currency.
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{{toc}}
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Although the United States [[dollar]] has been the ''de facto'' world currency, the possibility of developing an official world currency has come under discussion. Such a currency would be supported by a central bank for all transactions around the world, a step towards a more unified global society.
  
In most cases, each [[country]] has [[monopoly]] control over the supply and production of its own currency. Member countries of the [[European Union]]'s [[Economic and Monetary Union of the European Union|Economic and Monetary Union]] are a notable exception to this rule, as they have ceded control of monetary policy to the [[European Central Bank]].
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==Overview==
  
In cases where a country does have control of its own currency, that control is exercised either by a [[central bank]] or by a [[Finance minister|Ministry of Finance]]. In either case, 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. In the [[United States]], the [[Federal Reserve System]] operates without direct interference from the legislative or executive branches. It is important to note that a monetary authority is created and supported by its sponsoring government, so independence can be reduced or revoked by the legislative or executive authority that creates it. However, in practical terms, the revocation of authority is not likely. In almost all [[Western world|Western countries]], the monetary authority is largely independent from the government.
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'''Currency''' is used to facilitate [[trade]] by establishing standard values for items, removing the barrier of direct [[barter]]. In common usage, "currency" sometimes refers to only paper money, as in "coins and currency," but this is misleading. [[Coin]]s and paper money are both forms of currency.  
  
Several countries can use the same name, each for their own currency (e.g. [[Canadian dollar]]s and [[United States dollar]]s), several countries can use the same currency (e.g. the [[euro]]), or a country can declare the currency of another country to be [[legal tender]]. For example, [[Panama]] and [[El Salvador]] have declared U.S. currency to be legal tender, and from 1791-1857, [[Spain|Spanish]] silver coins were legal tender in the United States. At various times countries have either re-stamped foreign coins, or used [[currency board]] issuing one note of currency for each note of a foreign government held, as [[Ecuador]] currently does.
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A currency zone is a country or region in which a specific currency is the dominant medium of exchange. To facilitate [[international trade|trade]] between currency zones, there are [[exchange rate]]s, which are the prices at which currencies (and the goods and services of individual currency zones) can be exchanged against each other. Currencies can be classified as either [[floating currency|floating currencies]] or [[fixed currency|fixed currencies]] based on their [[exchange rate regime]].  
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[[File:Austrian 1 euro.png|thumb|left|175px|A one Euro coin from Austria dated 2002.]]
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In cases where a country has control of its own currency, that control is exercised either by a [[central bank]] or by a [[Finance minister|Ministry of Finance]]. In either case, the institution that has control of [[monetary policy]] is referred to as the monetary authority. Monetary authorities have varying degrees of [[autonomy]] from the [[government]]s that create them. In the [[United States]], the [[Federal Reserve System]] operates without direct interference from the legislative or executive branches. It is important to note that a monetary authority is created and supported by its sponsoring government, so independence can be reduced or revoked by the legislative or executive authority that creates it. However, in practical terms, the revocation of authority is not likely. In almost all [[Western world|Western countries]], the monetary authority is largely independent from the government.
  
Each currency typically has one fractional currency, often valued at {{frac|1|100}} of the main currency: 100 [[Cent (currency)|cent]]s = 1 [[dollar]], 100 [[centime]]s = 1 [[franc]], 100 [[British One Penny coin|pence]] = 1 [[pound (currency)|pound]]. Units of {{frac|1|10}} or {{frac|1|1000}} are also common, but some currencies do not have any smaller units. [[Mauritania]] and [[Madagascar]] are the only remaining countries that do not use the decimal system; instead, the Mauritanian [[Mauritanian ouguiya|ouguiya]] is divided into 5 [[khoums]], while the Malagasy [[Malagasy ariary|ariary]] is divided into 5 [[iraimbilanja]]. However, due to [[inflation]], both fractional units have in practice fallen into disuse.
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Several countries can use the same name, each for their own currency (such as [[Canadian dollar]]s and [[United States dollar]]s), several countries can use the same currency (such as the [[euro]]), or a country can declare the currency of another country to be [[legal tender]]. For example, [[Panama]] and [[El Salvador]] have declared United States currency to be legal tender, and from 1791-1857, [[Spain|Spanish]] silver coins were legal tender in the United States. At various times countries have either re-stamped foreign coins, or used [[currency board]] issuing one note of currency for each note of a foreign government held, as [[Ecuador]] currently does.
 
 
See [[non-decimal currencies]] for other (mostly historic) currencies with non-decimal divisions.
 
  
 
== History ==
 
== History ==
 
=== Early currency ===
 
=== Early currency ===
The origin of currency is the creation of a circulating [[medium of exchange]] based on a [[unit of account]] which quickly becomes a [[store of value]]. Currency evolved from two basic innovations: the use of counters to assure that shipments arrived with the same goods that were shipped, and later with the use of silver ingots to represent stored value in the form of grain. Both of these developments had occurred by 2000 B.C.E. Originally money was a form of receipting grain stored in temple granaries in [[ancient Egypt]] and [[Mesopotamia]].
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[[Image:326px-2006-01-28 Pu money.jpg|thumb|right|200px|Chinese Pu money made of bronze in the Sing Mang period of Han dynasty]]
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The origin of currency is the creation of a circulating [[medium of exchange]] based on a [[unit of account]] which quickly becomes a [[store of value]]. Currency evolved from two basic innovations: the use of counters to assure that shipments arrived with the same goods that were shipped, and later with the use of [[silver]] ingots to represent stored value in the form of [[grain]]. Both of these developments had occurred by 2000 B.C.E.. Originally [[money]] was a form of receipting grain stored in temple granaries in [[ancient Egypt]] and [[Mesopotamia]].
  
This first stage of currency, where metals were used to represent stored value, and symbols to represent commodities, formed the basis of trade in the [[Fertile Crescent]] for over 1500 years. However, the collapse of the Near Eastern trading system pointed 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. Trade could only reach as far as the credibility of that military. By the late [[Bronze Age]], however, a series of international treaties had established safe passage for merchants around the Eastern Mediterranean, spreading from [[Minoan]] [[Crete]] and [[Mycenae]] in the North West to [[Elam]] and [[Bahrein]] in the South East. Although it is not known what functioned as a currency to facilitate these exchanges, it is thought that ox-hide shaped ingots of copper, produced in [[Cyprus]] may have functioned as a currency.
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This first stage of currency, where [[metal]]s were used to represent stored value, and symbols to represent commodities, formed the basis of trade in the [[Fertile Crescent]] for over 1500 years. However, the collapse of the Near Eastern trading system pointed 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. Trade could only reach as far as the credibility of that military. By the late [[Bronze Age]], however, a series of international [[treaty|treaties]] had established safe passage for merchants around the Eastern Mediterranean, spreading from [[Minoan]] [[Crete]] and [[Mycenae]] in the North West to [[Elam]] and [[Bahrein]] in the South East. Although it is not known what functioned as a currency to facilitate these exchanges, it is thought that ox-hide shaped ingots of [[copper]], produced in [[Cyprus]] may have functioned as a currency.
  
It is thought that the increase in piracy and raiding associated with the [[Bronze Age collapse]], possibly produced by the [[Peoples of the Sea]], brought this trading system to an end. It was only with the recovery of Phoenician trade in the ninth and tenth centuries, that saw a return to prosperity, and the appearance of real coinage, possibly first in Anatolia with [[Croesus]] of [[Lydia]] and subsequently with the Greeks and Persians.
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It is thought that the increase in [[piracy]] and raiding associated with the [[Bronze Age collapse]], possibly produced by the [[Peoples of the Sea]], brought this trading system to an end. It was only with the recovery of [[Phoenicia]]n trade in the ninth and tenth centuries, that saw a return to prosperity, and the appearance of real coinage, possibly first in [[Anatolia]] with [[Croesus]] of [[Lydia]] and 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, the [[manilla currency]], ochre and other earth oxides, and so on. The manilla rings of [[West Africa]] were one of the currencies used from the 15th century onwards to buy and sell slaves. [[African currency]] is still notable for its variety, and in many places various forms of barter still apply.
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In [[Africa]] many forms of value store have been used including [[bead]]s, ingots, [[ivory]], various forms of weapons, livestock, the [[manilla currency]], [[ochre]] and other earth oxides, and so on. The manilla rings of [[West Africa]] were one of the currencies used from the fifteenth century onwards to buy and sell [[slavery|slaves]]. [[African currency]] is still notable for its variety, and in many places various forms of [[barter]] still apply.
  
 
=== Coinage ===
 
=== Coinage ===
These factors led to the shift of the store of value being the metal itself: at first silver, then both silver and gold. Metals were mined, weighed, and stamped into coins. This was to assure the individual taking the coin that he was getting a certain known weight of precious metal. Coins could be counterfeited, but they also created a new [[unit of account]], which helped lead to [[banking]]. [[Archimedes]]' principle was that the next link in currency occurred: coins could now be easily tested for their [[fine]] weight of metal, and thus the value of a coin could be determined, even if it had been shaved, debased or otherwise tampered with (see [[Numismatics]]).
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{{Main|Coin}}
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[[Image:Hasdrubal coin.jpg|right|thumb|175px|A coin showing Hasdrubal Barca, [[Hannibal]]'s younger brother.]]
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These factors led to the shift of the store of value being the [[metal]] itself: at first [[silver]], then both silver and [[gold]]. Metals were [[mining|mined]], weighed, and stamped into [[coin]]s. This was to assure the individual taking the coin that he was getting a certain known weight of precious metal. Coins could be [[counterfeit]]ed, but they also created a new [[unit of account]], which helped lead to [[banking]]. [[Archimedes]]' principle allowed the next development in currency to occur: coins could now be easily tested for their [[fine]] weight of metal, and thus the value of a coin could be determined, even if it had been shaved, debased or otherwise tampered with.
  
In most major economies using coinage, copper, silver and gold formed three tiers of coins. Gold coins were used for large purchases, payment of the military and backing of state activities. Silver coins were used for large, but common, transactions, and as a unit of account for taxes, dues, contracts and fealty, while copper coins represented the coinage of common transaction. This system had been used in ancient [[Indian coinage|India]] since the time of the [[Mahajanapadas]]. In Europe, this system worked through the [[medieval]] period because there was virtually no new gold, silver or copper introduced through mining or conquest. Thus the overall ratios of the three coinages remained roughly equivalent.
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In most major economies using coinage, [[copper]], silver, and gold formed three tiers of coins. Gold coins were used for large purchases, payment of the military and backing of state activities. Silver coins were used for large, but common, transactions, and as a unit of account for [[tax]]es, dues, [[contract]]s and [[fealty]], while copper coins represented the coinage of common transaction. This system had been used in ancient [[India]] since the time of the [[Mahajanapadas]]. In [[Europe]], this system worked through the [[medieval]] period because there was virtually no new gold, silver, or copper introduced through mining or conquest. Thus the overall ratios of the three coinages remained roughly equivalent.
  
 
=== Era of hard and credit money ===
 
=== Era of hard and credit money ===
In China, the need for credit and for circulating medium led to the introduction of paper money, commonly known today as [[banknote]]s. In Europe paper money was first introduced in Sweden in 1661. Sweden was rich in copper, thus, because of copper's low value, extraordinarily big coins (often weighing several kilograms) had to be made. Because the coin was so big, it was probably more convenient to carry a note stating your possession of such a coin than to carry the coin itself.
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In [[China]], the need for [[credit]] and for circulating medium led to the introduction of paper money, commonly known today as [[banknote]]s. In Europe paper money was first introduced in [[Sweden]] in 1661. Sweden was rich in copper, thus, because of [[copper]]'s low value, extraordinarily big coins (often weighing several kilograms) had to be made. Because the coin was so big, it was probably more convenient to carry a note stating your possession of such a coin than to carry the coin itself.
  
Paper money was, in one sense, a return to the oldest form of currency: it represented a store of value backed by the credibility of the issuing authority. Drafts, letters of credit and checks issued privately had been in intermittent use for centuries, however, it was with the rise of global trade that paper money would find a permanent place in currency.
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Paper money was, in one sense, a return to the oldest form of currency: it represented a store of value backed by the credibility of the issuing authority. Drafts, letters of credit, and checks issued privately had been in intermittent use for centuries, however, it was with the rise of global trade that paper money would find a permanent place in currency.
  
The advantages of paper currency were numerous: it reduced transport of gold and silver, and thus lowered the risks; it made loaning gold or silver at interest easier, since the specie (gold or silver) never left the possession of the lender until someone else redeemed the note; and it allowed for a division of currency into credit and specie backed forms. It enabled the sale of [[stock]] in [[joint stock company|joint stock companies]], and the redemption of those [[shares]] in paper.
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The advantages of paper currency were numerous: it reduced transport of [[gold]] and [[silver]], and thus lowered the risks; it made loaning gold or silver at [[interest]] easier, since the specie (gold or silver) never left the possession of the lender until someone else redeemed the note; and it allowed for a division of currency into credit and specie backed forms. It enabled the sale of [[stock]] in [[joint stock company|joint stock companies]], and the redemption of those [[shares]] in paper.
  
However, these advantages held within them disadvantages. First, since a note has no intrinsic value, there was nothing to stop issuing authorities from printing more of it than they had specie to back it with. Second, because it created money that did not exist, it increased inflationary pressures, a fact observed by [[David Hume]] in the [[18th century]]. The result is that 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 a [[standing army]].
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However, these advantages held within them disadvantages. First, since a note has no intrinsic value, there was nothing to stop issuing authorities from printing more of it than they had specie to back it with. Second, because it created money that did not exist, it increased [[inflation]]ary pressures, a fact observed by [[David Hume]] in the eighteenth century. The result is that 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 [[war]]s, and financing of wars, and therefore regarded as part of maintaining a [[standing army]]. For these reasons, paper currency was held in suspicion and hostility in Europe and America.  
  
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 established [[mint (coin)|mints]] to print money and mint coins, and branches of their treasury to collect taxes and hold gold and silver stock.
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It was also addictive, since the speculative [[profit]]s of trade and capital creation were quite large. Major nations established [[mint (coin)|mints]] to print money and mint coins, and branches of their treasury to collect taxes and hold gold and silver stock.
  
 
=== Legal tender era ===
 
=== Legal tender era ===
With the creation of [[central bank]]s, currency underwent several significant changes. During both the coinage and credit money eras the number of entities which had the ability to coin or print money was quite large. One could, literally, have "a license to print money"; many nobles had the right of coinage. Royal colonial companies, such as the Massachusetts Bay Company or the British East India Company could issue notes of credit—money backed by the promise to pay later, or exchangeable for payments owed to the company itself. This led to continual instability of the value of money. The exposure of coins to debasement and shaving, however, presented the same problem in another form: with each pair of hands a coin passed through, its value grew less.
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With the creation of [[central bank]]s, currency underwent several significant changes. During both the coinage and credit money eras the number of entities which had the ability to coin or print money was quite large. One could, literally, have "a license to print money"; many nobles had the right of coinage. Royal colonial companies, such as the Massachusetts Bay Company or the British East India Company could issue notes of credit—money backed by the promise to pay later, or exchangeable for payments owed to the company itself. This led to continual instability of the value of money. The exposure of coins to debasement and shaving, however, presented the same problem in another form: with each pair of hands a coin passed through, its value grew less.
  
The solution which evolved beginning in the late [[18th century]] and through the [[19th century]] was the creation of a central monetary authority which had a virtual monopoly on issuing currency, and whose notes had to be accepted for "all debts public and private." The creation of a truly national currency, backed by the government's store of precious metals, and enforced by their military and governmental control over an area was, in its time, extremely controversial. Advocates of the old system of [[Free Banking]] repealed central banking laws, or slowed down the adoption of restrictions on local currency. (See [[Gold standard]] for a fuller discussion of the creation of a standard gold based currency).
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The solution which evolved beginning in the late eighteenth century and through the nineteenth century was the creation of a central monetary authority which had a virtual [[monopoly]] on issuing currency, and whose notes had to be accepted for "all debts public and private." The creation of a truly national currency, backed by the government's store of precious metals, and enforced by their military and governmental control over an area was, in its time, extremely controversial. Advocates of the old system of [[Free Banking]] repealed central banking laws, or slowed down the adoption of restrictions on local currency.  
  
At this time both silver and gold were considered [[legal tender]], and accepted by governments for taxes. However, the instability in the ratio between the two grew over the course of the 19th century, with the increase both in supply of these metals, particularly silver, and of trade. This is called [[bimetallism]] and the attempt to create a bimetallic standard where both gold and silver backed currency remained in circulation occupied the efforts of [[inflation]]ists. Governments at this point could use currency as an instrument of policy, printing paper currency such as the United States [[Greenback]], 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.  
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[[Image:Lot1.jpg|thumb|left|250 px|German banknotes from 1910.]]
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At this time both silver and gold were considered [[legal tender]], and accepted by governments for taxes. However, the instability in the ratio between the two grew over the course of the nineteenth century, with the increase both in supply of these metals, particularly silver, and of trade. This is called [[bimetallism]] and the attempt to create a bimetallic standard where both gold and silver backed currency remained in circulation occupied the efforts of [[inflation]]ists. Governments at this point could use currency as an instrument of policy, printing paper currency such as the United States [[Greenback]], 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 of gold standard, with paper notes and silver coins constituting the circulating medium. Governments too followed [[Gresham's Law]]: keeping gold and silver paid, but paying out in notes.
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By 1900, most of the industrialized nations were on some form of gold standard, with paper notes and silver coins constituting the circulating medium. Governments too followed [[Gresham's Law]]: keeping gold and silver paid, but paying out in notes.
  
 
=== Paper money era ===
 
=== Paper money era ===
 
{{main|Banknote|Fiat currency}}
 
{{main|Banknote|Fiat currency}}
A [[banknote]] (more commonly known as a bill in the United States and Canada) is a type of currency, and commonly used as legal tender in many jurisdictions. With [[coin]]s, banknotes make up the [[cash]] form of all modern [[money]].
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[[Image:Euro-Banknoten.jpg|thumb|right|225px|Euro banknotes]]
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A [[banknote]] (more commonly known as a bill in the United States and Canada) is commonly used as legal tender in many jurisdictions. With [[coin]]s, banknotes make up the [[cash]] form of all modern [[money]].  
  
== Modern currencies ==
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Banknotes normally have no intrinsic value, that is the paper from which banknotes are made is worth very little if not in the form of a banknote. This is opposed to the idea of [[gold]] or [[silver]] coins, which have some intrinsic value. This eliminates the risk of carrying around precious metals and also eliminates the burden of carrying around large sums of heavy coins.  
To find out which currency is used in a particular country, check [[list of circulating currencies]].
 
  
Nowadays, the [[International Organization for Standardization]] has introduced a three-letter system of codes ([[ISO 4217]]) to define currency (as opposed to simple names or [[currency sign]]s), in order to remove the confusion that there are dozens of currencies called the [[dollar]] and many called the [[franc]]. Even the [[Pound (currency)|pound]] is used in nearly a dozen different countries, all, of course, with wildly differing values. In general, the three-letter code uses the [[ISO 3166-1]] country code for the first two letters and the first letter of the name of the currency (D for dollar, for instance) as the third letter.
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Most modern banknotes are [[fiat currency]], or money that is backed by government demand as [[legal tender]], meaning that note cannot be refused for repayment of a debt. Checks, [[credit card]]s, and debit cards are not usually considered legal tender, which is why certain stores do not accept one or any of those forms of payment.  
  
The [[International Monetary Fund]] uses a variant system when referring to national currencies.
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Fiat currency adds an essential level of stability to economic transactions as buyers and sellers do not have to doubt the value of the medium of exchange (namely the money). This allows transactions to occur based solely on the buyer's desire to buy and the seller's desire to sell and the value that each places on the good or service for sale rather than considering the outside factor of the medium of exchange. Fiat currency removes the concept of money as a commodity, which was the case when gold or silver was traded for items.
 
 
:''For exchange rates, see [[exchange rate]] and [[table of historical exchange rates]].''
 
  
 
== Privately issued currencies ==
 
== Privately issued currencies ==
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From the earliest times [[token coin]]s were issued by companies in remote parts of the world to overcome the shortage of circulating currency.
 
From the earliest times [[token coin]]s were issued by companies in remote parts of the world to overcome the shortage of circulating currency.
  
Several large companies issue points to their customers, to be redeemed for products and services produced by that company. Often, a [[business network|network]] of companies will join to share in the offering and redemption of points. While these can hardly be considered stable currency systems, they present many of the same features as "legitimate" currency: they are a store of value, issued in discrete units; they are controlled by a central issuing authority; and they have varying rates of exchange with other forms of currency. For example, [[frequent flyer miles]] can be bought using U.S. dollars.
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Several large companies issue points to their customers, to be redeemed for products and services produced by that company. Often, a [[business network|network]] of companies will join to share in the offering and redemption of points. While these can hardly be considered stable currency systems, they present many of the same features as "legitimate" currency: they are a store of value, issued in discrete units; they are controlled by a central issuing authority; and they have varying rates of exchange with other forms of currency.  
 
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[[Image:Nyc transit authority token.png|thumb|right|150 px|New York City subway token]]
*[[Casino token]]: Chips are used in wagering for various reasons - mostly to make it easier to recognize or count the amount of a wager by eye, or (as in [[roulette]] or [[craps]]) to distinguish wagers belonging to different players that by necessity must be played near each other.  
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*[[Casino token]]: Chips are used in wagering for various reasons—mostly to make it easier to recognize or count the amount of a wager by eye, or (as in [[roulette]] or [[craps]]) to distinguish wagers belonging to different players that by necessity must be played near each other.  
  
 
*[[Alternative currency]]: A currency such as the [[Liberty Dollar]] that is intended to replace or compete with a national currency.
 
*[[Alternative currency]]: A currency such as the [[Liberty Dollar]] that is intended to replace or compete with a national currency.
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*[[Digital gold currency]]: Privately issued digital currency backed by [[gold]]
 
*[[Digital gold currency]]: Privately issued digital currency backed by [[gold]]
  
*[[Frequent flyer miles]]: A type of private currency, different versions of which are issued by most major [[airlines]] to encourage [[customer loyalty]]. Other customer loyalty incentives have followed this model, including points systems offered by soft drink manufacturers such as [[PepsiCo]].  
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*[[Frequent flyer miles]]: A type of private currency, different versions of which are issued by most major [[airlines]] to encourage [[customer loyalty]]. Other customer loyalty incentives have followed this model, including points systems offered by many businesses.  
  
 
*[[Metro|Subway]] tokens, issued by city transit authorities, can be considered a highly specialized form of currency.
 
*[[Metro|Subway]] tokens, issued by city transit authorities, can be considered a highly specialized form of currency.
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*Digital public transport currency, stored on a smart card and sold in exchange of real money.
 
*Digital public transport currency, stored on a smart card and sold in exchange of real money.
  
*[[Scrip]]: A type of private currency where a certain value is captured, and used to purchase goods from a company. Examples of scrip include gift certificates, gift cards, and [[Disney Dollar]]s, [[Canadian Tire Money]] and more recently [[Microsoft Points]] on the [[Xbox Live Marketplace]]. However, scrip is not considered a currency in itself, but merely a store of value, denominated in another currency.
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*[[Scrip]]: A type of private currency where a certain value is captured, and used to purchase goods from a company. Examples of scrip include gift certificates, gift cards, and [[Disney Dollar]]s. However, scrip is not considered a currency in itself, but merely a store of value, denominated in another currency.
 
 
*[[Coupons]]: are a form of currency that is recognized by businesses, not to purchase a product or service, but to deduct from the total cost, promote benefits, rebates or discounts. Coupons are primarily used as a marketing tool.
 
 
 
== Local currencies ==
 
{{main|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 as Jane Jacobs argue 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 which can interfere with economies of scale and comparative advantage, and that in some cases they can serve as a means of tax evasion.
 
 
 
Local currencies can also come into being when there is economic turmoil involving the national currency. An example of this is the Argentine economic crisis of 2002 in which IOUs issued by local governments quickly took on some of the characteristics of local currencies.
 
 
 
 
 
==Proposed currencies==
 
*[[Eco (currency)|Eco]] - [[West African Monetary Zone]] ([[Gambia]], [[Ghana]], [[Guinea]], [[Nigeria]], [[Sierra Leone]], possibly [[Liberia]])
 
*[[Mozambican metica|Metica]] - [[Mozambique]] (never implemented)
 
*[[Montenegrin perun|Perun]] - [[Montenegro]] (never implemented)
 
*[[Amero]] - [[American currency union]] (hypothetical)
 
*[[Asian Currency Unit]] - proposed for the [[ASEAN +3]]
 
*[[East African shilling]] - [[East African Community]] ([[Burundi]], [[Kenya]], [[Rwanda]], [[Tanzania]], [[Uganda]])
 
*[[Khaleeji]] - [[Cooperation Council for the Arab States of the Gulf|Gulf Cooperation Council]] ([[Bahrain]], [[Kuwait]], [[Oman]], [[Qatar]], [[Saudi Arabia]], [[United Arab Emirates]])
 
*Currency for Caribbean area<ref>[http://www.jamaica-gleaner.com/gleaner/20060131/lead/lead1.html CARICOM Single Market (CSM) ratified]. This article mentions a single currency but does not speculate on a name</ref>- [[CARICOM]] states except the Bahamas
 
 
 
==World currency==
 
In the [[foreign exchange market]] and [[international finance]], a '''world currency''' or '''global currency''' refers to a [[currency]] in which the vast majority of international transactions take place and which serves as the world's primary [[reserve currency]].
 
 
 
===United States dollar and the euro===
 
[[Image:DOLLAR AND EURO IN THE WORLD.svg|right|300px|thumb|Comparison of worldwide use of the [[United States dollar|U.S. dollar]] and the [[euro]]]]
 
Since the mid-[[20th century]], the ''[[de facto]]'' world currency has been the [[United States dollar]]. According to [[Robert Gilpin]] in ''Global Political Economy: Understanding the International Economic Order'' (2001): "Somewhere between 40 and 60 percent of international financial transactions are denominated in dollars. For decades the dollar has also been the world's principle reserve currency; in 1996, the dollar accounted for approximately two-thirds of the world's foreign exchange reserves" (255).
 
 
 
Many of the world's currencies are pegged against the dollar. Some countries, such as [[Ecuador]], [[El Salvador]], and [[Panama]], have gone even further and [[dollarization|eliminated their own currency ]]in favor of the United States dollar.
 
 
 
Since 1999, the dollar's dominance has begun to be undermined by the [[euro]], that represents a larger size economy, with the prospect of more countries adopting the euro as their national currency.  The euro inherited the status of a major reserve currency from the [[Germany|German]] [[Deutsche Mark]], an since than its contribution to official reserves has risen continually as banks seek to diversify their reserves and trade in the [[eurozone]] continues to expand.<ref>http://www.imf.org/external/pubs/ft/wp/2006/wp06153.pdf</ref>
 
 
 
Similar to the dollar, quite a few of the world's currencies are pegged against the euro. They are usually [[Eastern Europe]]an currencies like the [[Estonian kroon]] and the [[Bulgarian lev]], plus several [[north Africa]]n currencies like the [[Cape Verdean escudo]] and the [[CFA franc]].
 
 
 
As of December 2006, the euro surpassed the dollar in the combined value of cash in circulation. The value of euro notes in circulation has risen to more than €610 [[1000000000 (number)|billion]], equivalent to US$800 billion at the exchange rates at this time.<ref>http://www.ft.com/cms/s/18338034-95ec-11db-9976-0000779e2340.html</ref>
 
 
 
===History===
 
====Spanish Dollar: 17th-19th centuries====
 
In the 16th and 17th century, the use of silver [[Spanish dollar]]s or "pieces of eight" spread from the Spanish territories in the Americas eastwards to Asia and westwards to Europe forming the first ever {{fact|date=June 2007}} worldwide currency. Spain's political supremacy on the world stage, as well as the coin's quality and purity of silver, made it become internationally accepted for over two centuries. It was legal tender in Spain's Pacific territories of [[Philippines]], [[Micronesia]], [[Guam]] and the [[Caroline Islands]] and later in [[China]] and other Southeast Asian countries until the mid 19th century. In the Americas it was legal tender in all of South and Central America (except Brazil) as well as in the [[U.S.]] and [[Canada]] until the mid-19th century. In Europe the Spanish dollar was legal tender in the [[Iberian Peninsula]], in most of [[Italy]] including: [[Milan]], the [[Kingdom of Naples]], [[Sicily]] and [[Sardinia]], as well as in the [[Franche-Comté]] (France), and in the [[Spanish Netherlands]]. It was also used in other European states including the Austrian [[Hapsburg]] territories.
 
 
 
====19th - 20th centuries====
 
Prior to and during most of the 1800s international trade was denominated in terms of currencies that represented weights of gold. Most national currencies at the time were in essence merely different ways of measuring gold weights (much as the yard and the metre both measure length and are related by a constant conversion factor). Hence some assert that gold was the world's first global currency. The emerging collapse of the international gold standard around the time of World War I had significant implications for global trade.
 
 
 
In the period following the [[Bretton Woods Conference]] of 1944, [[exchange rate]]s around the world were [[Fixed exchange rate|pegged]] against the [[United States dollar]], which could be exchanged for a fixed amount of [[gold]]. This reinforced the dominance of the US dollar a global currency.
 
  
Since the collapse of the [[fixed exchange rate]] regime and the [[gold standard]] and the institution of [[floating exchange rate]]s following the [[Smithsonian Agreement]] in 1971, currencies around the world have no longer been pegged against the United States dollar. However, as the United States remained the world's preeminent economic [[superpower]], most international transactions continued to be conducted with the United States dollar, it has remained the ''[[de facto]]'' world currency.
+
*[[Coupon]]s: are a form of currency that is recognized by businesses, not to purchase a product or service, but to deduct from the total cost, promote benefits, rebates or discounts. Coupons are primarily used as a marketing tool.
  
Only two serious challengers to the status of the United States dollar as a world currency have arisen. During the 1980s, for a while, the [[Japanese yen]] became increasingly used as an international currency, but that usage diminished with the Japanese recession in the 1990s. More recently, the [[euro]] has competed with the United States dollar in usage in international finance.
+
==World Currency==
 +
[[Image:USCurrency Federal Reserve.jpg|thumb|right|200 px|Images of various US dollars.]]
 +
In the [[foreign exchange market]] and [[international finance]], a ''world currency'' or ''global currency'' refers to a [[currency]] in which the vast majority of international transactions take place and which serves as the world's primary [[reserve currency]].
  
===Hypothetical single "true" global currency===
+
Since the mid-twentieth century, the ''[[de facto]]'' world currency has been the [[United States dollar]]:
An alternative definition of a world or global currency refers to a hypothetical single global currency, as the proposed [[Terra_Currency|Terra]], produced and supported by a [[central bank]] which is used for ''all'' transactions around the world, regardless of the [[nationality]] of the entities (individuals, corporations, governments, or other organisations) involved in the transaction. No such official currency currently exists for a variety of reasons, political and economic.
+
<blockquote>Somewhere between 40 and 60 percent of international financial transactions are denominated in dollars. For decades the dollar has also been the world's principle reserve currency; in 1996, the dollar accounted for approximately two-thirds of the world's foreign exchange reserves.<ref>Robert Gilpin, ''Global Political Economy: Understanding the International Economic Order'' (Orient Longman, 2001, ISBN 8125023062), 255.</ref></blockquote>
  
There are many different variations of the idea, including a possibility that it would be administered by a global [[central bank]] or that it would be on the [[gold standard]] [http://www.gold-eagle.com/editorials_05/wallenwein070805.html]. Supporters often point to the [[euro]] as an example of a supranational currency successfully implemented by a union of nations with disparate languages, cultures, and economies. Alternatively, [[digital gold currency]] can be viewed as an example of how global currency can be implemented without achieving national government consensus.
+
An alternative definition of a world or global currency refers to a hypothetical single global currency, which would be produced and supported by a [[central bank]] which is used for ''all'' transactions around the world, regardless of the [[nationality]] of the entities (individuals, corporations, governments, or other organizations) involved in the transaction. No such official currency currently exists for a variety of reasons, political and economic. Belgian economist [[Bernard Lietaer]] has proposed [[Terra_Currency|Terra]] as a possible "world currency," based on the idea in an article in the [[France|French]] [[newspaper]] ''Le Fédériste'' on January 1st 1933, which suggested the establishment of ''L'Europa – monnaie de la paix'', (in English "Europe - Money of peace").<ref>Bernard Lietaer, ''Das Geld der Zukunft'' (München, 2002, ISBN 3570500357).</ref>
  
===Arguments for a global currency===
 
 
Some of the benefits cited by advocates of a global currency are that it would:
 
Some of the benefits cited by advocates of a global currency are that it would:
*Eliminate speculation in [[Forex]] since there is a need for a currency ''pair'' to speculate.
+
*Eliminate speculation in [[Foreign exchange market]]s (Forex) since there is a need for a currency ''pair'' to speculate.
*Eliminate the direct and indirect [[transaction cost]]s of trading from one currency to another[http://www.singleglobalcurrency.org/why_an_sgc.html].
+
*Eliminate the direct and indirect [[transaction cost]]s of trading from one currency to another
 
*Eliminate the [[balance of payments]]/[[current account]] problems of all countries.
 
*Eliminate the [[balance of payments]]/[[current account]] problems of all countries.
 
*Eliminate the risk of [[currency failure]] and [[currency risk]].
 
*Eliminate the risk of [[currency failure]] and [[currency risk]].
Line 146: Line 110:
 
*Eliminate the misalignment of currencies.
 
*Eliminate the misalignment of currencies.
 
*Utilize the [[seigniorage]] benefit and control of printing money for the operations of the global central bank and for public benefit.
 
*Utilize the [[seigniorage]] benefit and control of printing money for the operations of the global central bank and for public benefit.
*Eliminate the need for countries or monetary unions to maintain international reserves of other currencies.
+
*Eliminate the need for countries or monetary unions to maintain international reserves of other currencies.<ref>[http://www.singleglobalcurrency.org/why_an_sgc.html Why a Single Global Currency], Single Global Currency Association. Retrieved October 9, 2007.</ref>
<!--Text quoted by permission of Single Global Currency Association—>
 
 
 
===Arguments against a single global currency===
 
 
 
Many economists argue that a single global currency is unworkable given the vastly different national political and economic systems in existence.
 
 
 
====Loss of national monetary policy====
 
 
 
With one currency, there can only be one interest rate. This results in rendering each present currency area unable to choose the interest rate which suits its economy best. If, for example, the [[United States]] were to have an [[economic boom]] while the [[European Union]] slumped into a depression, this period would be eased if each could choose the interest rate which best fitted its needs (in this case, a relatively high interest rate in the former, and a relatively low one in the latter).
 
 
 
====Political difficulties====
 
 
 
In the present world, nations are not yet able to work together closely enough to be able to produce and support a common currency. There has to be a high level of trust between different countries before a true world currency could be created.  A world currency might even undermine national sovereignty of smaller states.
 
 
 
A currency needs an interest rate, while one of the largest religions in the world, Islam, is against the idea of interest rate. This might prove to be an unsolvable problem for a world currency, if religious views concerning interest do not moderate.
 
 
 
An interest rate is one of the fundamental laws of a market economy. Depositing of money is important because it lets the money be lent out where it is needed most, for instance when establising a new company or buying a house for a family. In order to get strangers to lend each other money the creditors needs to get compensated for their risk taken and their good will. If not they would just spend the money, or keep it or invest it somewhere else. If you want to be without interest rate you need other ways to compensate depositors, and the compensation would have to be in the form of money, in other words an interest-look-alike.
 
 
 
====Economical difficulties====
 
 
 
Some economists argue that a single world currency is unnecessary, because the U.S. dollar already provides many of the benefits of a world currency while avoiding some of the costs [http://www.oracle.com/oramag/profit/02-aug/p32forward.html].
 
 
 
If the world does not form an [[optimum currency area]], then it would be economically inefficient for the world to share one currency.
 
 
 
A world currency would not allow for adjustments by national central banks to accommodate local economic problems. A single currency can only have a single [[interest rate]]. However, different regions in the world, with varying rates of economic growth, may require different interest rates.
 
 
 
As an example, consider a hypothetical Country A that is a [[petroleum]] [[exporter]] and a hypothetical Country B that is an oil [[importer]]. If the price of oil goes up, this is an advantage for Country A, and a disadvantage for Country B. If the oil price goes up, this stimulates the economy of Country A; to avoid "overheating" the economy, Country A's central bank would support increasing the interest rate of Country A. At the same time, Country B's economy is damaged by the increased price of oil, and Country B's central bank would seek to lower the interest rate in order to stimulate the economy. However, Country A and Country B would be unable to do this if they shared the same currency.
 
 
 
====Other Arguments====
 
 
 
Some Christians believe that a single world currency is a sign of the End Days, when the world is united under a One World Order {{fact|date=June 2007}}.
 
 
 
  
 +
Opponents of a global currency cite the following issues:
 +
* Loss of national [[monetary policy]], making economic adjustments difficult
 +
* Political difficulties: Existing global tensions are not suitable for the development of the trust necessary to implement a single currency
 +
* Loss of sovereignty: Small nations might be completely overtaken with the implementation of a global currency
 +
* Some economists argue that a single world currency is unnecessary, because the U.S. dollar already provides many of the benefits of a world currency while avoiding some of the costs
  
 
==Notes==
 
==Notes==
Line 185: Line 122:
  
 
==References==
 
==References==
 +
*Erdman, Paul. 1996. ''Tug of War: Today's Global Currency Crisis''. Palgrave Macmillan. ISBN 0312158998
 +
*Gilpin, Robert. 2001. ''Global Political Economy: Understanding the International Economic Order''. ISBN 8125023062
 +
*Graham, Benjamin. 1998. ''World Commodities and World Currency''. McGraw Hill. ISBN 0070248060
 +
*Harris, Lesley Ellen. 1998. ''Digital Property: Currency of the 21st Century''. McGraw Hill. ISBN 0075528460
 +
*Kirshner, Jonathan. ''Currency and Coercion''. 1997. Princeton University Press. ISBN 0691016267
 +
*Lietaer, Bernard. 2002. ''Das Geld der Zukunft''. München. ISBN 3570500357
 +
*Maurer, William. 2005. ''Mutual Life, Limited: Islamic Banking, Alternative Currencies, Lateral Reason''. Princeton University Press. ISBN 0691121966
 +
*McKinnon, Ronald. 1979. ''Money in International Exchange: The Convertible Currency System''. Oxford University Press. ISBN 0195024095
 +
*Sumner, William Graham. 2005. ''A History of American Currency''. Cosimo Classics. ISBN 1596050810
  
 
==External links==
 
==External links==
*[http://www.singleglobalcurrency.org/ Single Global Currency Association].
+
All links retrieved July 21, 2013.
*[http://www.gold-eagle.com/editorials_05/wallenwein070805.html A Single Global Currency? Sure, why not. But, only if it's Gold and Silver Bullion!].
+
 
*[http://www.nni.nikkei.co.jp/FR/NIKKEI/inasia/future/2001/2001news12.html Malaysia Mahathir Proposes Single Global Currency].
+
*[http://www.singleglobalcurrency.org/ Single Global Currency Association].  
*[http://www.oracle.com/oramag/profit/02-aug/p32forward.html Is it Time for a Single, Global Currency?].
 
*[http://asianq.com/world-currency-platform World Currency Exchange Platform].
 
  
 
{{Credits|Currency|155687760|World_currency|161382767|}}
 
{{Credits|Currency|155687760|World_currency|161382767|}}

Revision as of 15:44, 22 July 2015


File:Moneybillscoins3.jpg
Various denominations of money used in different countries

A currency is a unit of exchange, facilitating the transfer of goods and services. It is one form of money, where money is anything that serves as a medium of exchange, a store of value, and a standard of value. Historically, currencies have developed items considered valuable such as shells, or cattle, to the use of precious metals first in forms such as ingots and later coins, and then to credit and paper money. Fiat money removes the concept of money as a commodity, guaranteeing that it has the value stated on it. There are also privately issued currencies that may be redeemed only by those who produce them.

In most cases, each country has monopoly control over the supply and production of its own currency, usually through a central bank. Member countries of the European Union's Economic and Monetary Union are a notable exception to this rule, as they have ceded control of monetary policy to the European Central Bank and accept the Euro as their common currency.

Although the United States dollar has been the de facto world currency, the possibility of developing an official world currency has come under discussion. Such a currency would be supported by a central bank for all transactions around the world, a step towards a more unified global society.

Overview

Currency is used to facilitate trade by establishing standard values for items, removing the barrier of direct barter. In common usage, "currency" sometimes refers to only paper money, as in "coins and currency," but this is misleading. Coins and paper money are both forms of currency.

A currency zone is a country or region in which a specific currency is the dominant medium of exchange. To facilitate trade between currency zones, there are exchange rates, which are the prices at which currencies (and the goods and services of individual currency zones) can be exchanged against each other. Currencies can be classified as either floating currencies or fixed currencies based on their exchange rate regime.

File:Austrian 1 euro.png
A one Euro coin from Austria dated 2002.

In cases where a country has control of its own currency, that control is exercised either by a central bank or by a Ministry of Finance. In either case, 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. In the United States, the Federal Reserve System operates without direct interference from the legislative or executive branches. It is important to note that a monetary authority is created and supported by its sponsoring government, so independence can be reduced or revoked by the legislative or executive authority that creates it. However, in practical terms, the revocation of authority is not likely. In almost all Western countries, the monetary authority is largely independent from the government.

Several countries can use the same name, each for their own currency (such as Canadian dollars and United States dollars), several countries can use the same currency (such as the euro), or a country can declare the currency of another country to be legal tender. For example, Panama and El Salvador have declared United States currency to be legal tender, and from 1791-1857, Spanish silver coins were legal tender in the United States. At various times countries have either re-stamped foreign coins, or used currency board issuing one note of currency for each note of a foreign government held, as Ecuador currently does.

History

Early currency

Chinese Pu money made of bronze in the Sing Mang period of Han dynasty

The origin of currency is the creation of a circulating medium of exchange based on a unit of account which quickly becomes a store of value. Currency evolved from two basic innovations: the use of counters to assure that shipments arrived with the same goods that were shipped, and later with the use of silver ingots to represent stored value in the form of grain. Both of these developments had occurred by 2000 B.C.E.. Originally money was a form of receipting grain stored in temple granaries in ancient Egypt and Mesopotamia.

This first stage of currency, where metals were used to represent stored value, and symbols to represent commodities, formed the basis of trade in the Fertile Crescent for over 1500 years. However, the collapse of the Near Eastern trading system pointed 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. Trade could only reach as far as the credibility of that military. By the late Bronze Age, however, a series of international treaties had established safe passage for merchants around the Eastern Mediterranean, spreading from Minoan Crete and Mycenae in the North West to Elam and Bahrein in the South East. Although it is not known what functioned as a currency to facilitate these exchanges, it is thought that ox-hide shaped ingots of copper, produced in Cyprus may have functioned as a currency.

It is thought that the increase in piracy and raiding associated with the Bronze Age collapse, possibly produced by the Peoples of the Sea, brought this trading system to an end. It was only with the recovery of Phoenician trade in the ninth and tenth centuries, that saw a return to prosperity, and the appearance of real coinage, possibly first in Anatolia with Croesus of Lydia and 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, the manilla currency, ochre and other earth oxides, and so on. The manilla rings of West Africa were one of the currencies used from the fifteenth century onwards to buy and sell slaves. African currency is still notable for its variety, and in many places various forms of barter still apply.

Coinage

Main article: Coin
A coin showing Hasdrubal Barca, Hannibal's younger brother.

These factors led to the shift of the store of value being the metal itself: at first silver, then both silver and gold. Metals were mined, weighed, and stamped into coins. This was to assure the individual taking the coin that he was getting a certain known weight of precious metal. Coins could be counterfeited, but they also created a new unit of account, which helped lead to banking. Archimedes' principle allowed the next development in currency to occur: coins could now be easily tested for their fine weight of metal, and thus the value of a coin could be determined, even if it had been shaved, debased or otherwise tampered with.

In most major economies using coinage, copper, silver, and gold formed three tiers of coins. Gold coins were used for large purchases, payment of the military and backing of state activities. Silver coins were used for large, but common, transactions, and as a unit of account for taxes, dues, contracts and fealty, while copper coins represented the coinage of common transaction. This system had been used in ancient India since the time of the Mahajanapadas. In Europe, this system worked through the medieval period because there was virtually no new gold, silver, or copper introduced through mining or conquest. Thus the overall ratios of the three coinages remained roughly equivalent.

Era of hard and credit money

In China, the need for credit and for circulating medium led to the introduction of paper money, commonly known today as banknotes. In Europe paper money was first introduced in Sweden in 1661. Sweden was rich in copper, thus, because of copper's low value, extraordinarily big coins (often weighing several kilograms) had to be made. Because the coin was so big, it was probably more convenient to carry a note stating your possession of such a coin than to carry the coin itself.

Paper money was, in one sense, a return to the oldest form of currency: it represented a store of value backed by the credibility of the issuing authority. Drafts, letters of credit, and checks issued privately had been in intermittent use for centuries, however, it was with the rise of global trade that paper money would find a permanent place in currency.

The advantages of paper currency were numerous: it reduced transport of gold and silver, and thus lowered the risks; it made loaning gold or silver at interest easier, since the specie (gold or silver) never left the possession of the lender until someone else redeemed the note; and it allowed for a division of currency into credit and specie backed forms. It enabled the sale of stock in joint stock companies, and the redemption of those shares in paper.

However, these advantages held within them disadvantages. First, since a note has no intrinsic value, there was nothing to stop issuing authorities from printing more of it than they had specie to back it with. Second, because it created money that did not exist, it increased inflationary pressures, a fact observed by David Hume in the eighteenth century. The result is that 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 a standing 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 established mints to print money and mint coins, and branches of their treasury to collect taxes and hold gold and silver stock.

Legal tender era

With the creation of central banks, currency underwent several significant changes. During both the coinage and credit money eras the number of entities which had the ability to coin or print money was quite large. One could, literally, have "a license to print money"; many nobles had the right of coinage. Royal colonial companies, such as the Massachusetts Bay Company or the British East India Company could issue notes of credit—money backed by the promise to pay later, or exchangeable for payments owed to the company itself. This led to continual instability of the value of money. The exposure of coins to debasement and shaving, however, presented the same problem in another form: with each pair of hands a coin passed through, its value grew less.

The solution which evolved beginning in the late eighteenth century and through the nineteenth century was the creation of a central monetary authority which had a virtual monopoly on issuing currency, and whose notes had to be accepted for "all debts public and private." The creation of a truly national currency, backed by the government's store of precious metals, and enforced by their military and governmental control over an area was, in its time, extremely controversial. Advocates of the old system of Free Banking repealed central banking laws, or slowed down the adoption of restrictions on local currency.

German banknotes from 1910.

At this time both silver and gold were considered legal tender, and accepted by governments for taxes. However, the instability in the ratio between the two grew over the course of the nineteenth century, with the increase both in supply of these metals, particularly silver, and of trade. This is called bimetallism and the attempt to create a bimetallic standard where both gold and silver backed currency remained in circulation occupied the efforts of inflationists. Governments at this point could use currency as an instrument of policy, printing paper currency such as the United States Greenback, 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 industrialized nations were on some form of gold standard, with paper notes and silver coins constituting the circulating medium. Governments too followed Gresham's Law: keeping gold and silver paid, but paying out in notes.

Paper money era

Euro banknotes

A banknote (more commonly known as a bill in the United States and Canada) is commonly used as legal tender in many jurisdictions. With coins, banknotes make up the cash form of all modern money.

Banknotes normally have no intrinsic value, that is the paper from which banknotes are made is worth very little if not in the form of a banknote. This is opposed to the idea of gold or silver coins, which have some intrinsic value. This eliminates the risk of carrying around precious metals and also eliminates the burden of carrying around large sums of heavy coins.

Most modern banknotes are fiat currency, or money that is backed by government demand as legal tender, meaning that note cannot be refused for repayment of a debt. Checks, credit cards, and debit cards are not usually considered legal tender, which is why certain stores do not accept one or any of those forms of payment.

Fiat currency adds an essential level of stability to economic transactions as buyers and sellers do not have to doubt the value of the medium of exchange (namely the money). This allows transactions to occur based solely on the buyer's desire to buy and the seller's desire to sell and the value that each places on the good or service for sale rather than considering the outside factor of the medium of exchange. Fiat currency removes the concept of money as a commodity, which was the case when gold or silver was traded for items.

Privately issued currencies

From the earliest times token coins were issued by companies in remote parts of the world to overcome the shortage of circulating currency.

Several large companies issue points to their customers, to be redeemed for products and services produced by that company. Often, a network of companies will join to share in the offering and redemption of points. While these can hardly be considered stable currency systems, they present many of the same features as "legitimate" currency: they are a store of value, issued in discrete units; they are controlled by a central issuing authority; and they have varying rates of exchange with other forms of currency.

New York City subway token
  • Casino token: Chips are used in wagering for various reasons—mostly to make it easier to recognize or count the amount of a wager by eye, or (as in roulette or craps) to distinguish wagers belonging to different players that by necessity must be played near each other.
  • Alternative currency: A currency such as the Liberty Dollar that is intended to replace or compete with a national currency.
  • Digital gold currency: Privately issued digital currency backed by gold
  • Frequent flyer miles: A type of private currency, different versions of which are issued by most major airlines to encourage customer loyalty. Other customer loyalty incentives have followed this model, including points systems offered by many businesses.
  • Subway tokens, issued by city transit authorities, can be considered a highly specialized form of currency.
  • Digital public transport currency, stored on a smart card and sold in exchange of real money.
  • Scrip: A type of private currency where a certain value is captured, and used to purchase goods from a company. Examples of scrip include gift certificates, gift cards, and Disney Dollars. However, scrip is not considered a currency in itself, but merely a store of value, denominated in another currency.
  • Coupons: are a form of currency that is recognized by businesses, not to purchase a product or service, but to deduct from the total cost, promote benefits, rebates or discounts. Coupons are primarily used as a marketing tool.

World Currency

Images of various US dollars.

In the foreign exchange market and international finance, a world currency or global currency refers to a currency in which the vast majority of international transactions take place and which serves as the world's primary reserve currency.

Since the mid-twentieth century, the de facto world currency has been the United States dollar:

Somewhere between 40 and 60 percent of international financial transactions are denominated in dollars. For decades the dollar has also been the world's principle reserve currency; in 1996, the dollar accounted for approximately two-thirds of the world's foreign exchange reserves.[1]

An alternative definition of a world or global currency refers to a hypothetical single global currency, which would be produced and supported by a central bank which is used for all transactions around the world, regardless of the nationality of the entities (individuals, corporations, governments, or other organizations) involved in the transaction. No such official currency currently exists for a variety of reasons, political and economic. Belgian economist Bernard Lietaer has proposed Terra as a possible "world currency," based on the idea in an article in the French newspaper Le Fédériste on January 1st 1933, which suggested the establishment of L'Europa – monnaie de la paix, (in English "Europe - Money of peace").[2]

Some of the benefits cited by advocates of a global currency are that it would:

  • Eliminate speculation in Foreign exchange markets (Forex) since there is a need for a currency pair to speculate.
  • Eliminate the direct and indirect transaction costs of trading from one currency to another
  • Eliminate the balance of payments/current account problems of all countries.
  • Eliminate the risk of currency failure and currency risk.
  • Eliminate the uncertainty of changes in value due to exchange-caused fluctuations in currency value and the costs of hedging to protect against such fluctuations.
  • Cause an increase in the value of assets for those countries currently afflicted with significant country risk.
  • Eliminate the misalignment of currencies.
  • Utilize the seigniorage benefit and control of printing money for the operations of the global central bank and for public benefit.
  • Eliminate the need for countries or monetary unions to maintain international reserves of other currencies.[3]

Opponents of a global currency cite the following issues:

  • Loss of national monetary policy, making economic adjustments difficult
  • Political difficulties: Existing global tensions are not suitable for the development of the trust necessary to implement a single currency
  • Loss of sovereignty: Small nations might be completely overtaken with the implementation of a global currency
  • Some economists argue that a single world currency is unnecessary, because the U.S. dollar already provides many of the benefits of a world currency while avoiding some of the costs

Notes

  1. Robert Gilpin, Global Political Economy: Understanding the International Economic Order (Orient Longman, 2001, ISBN 8125023062), 255.
  2. Bernard Lietaer, Das Geld der Zukunft (München, 2002, ISBN 3570500357).
  3. Why a Single Global Currency, Single Global Currency Association. Retrieved October 9, 2007.

References
ISBN links support NWE through referral fees

  • Erdman, Paul. 1996. Tug of War: Today's Global Currency Crisis. Palgrave Macmillan. ISBN 0312158998
  • Gilpin, Robert. 2001. Global Political Economy: Understanding the International Economic Order. ISBN 8125023062
  • Graham, Benjamin. 1998. World Commodities and World Currency. McGraw Hill. ISBN 0070248060
  • Harris, Lesley Ellen. 1998. Digital Property: Currency of the 21st Century. McGraw Hill. ISBN 0075528460
  • Kirshner, Jonathan. Currency and Coercion. 1997. Princeton University Press. ISBN 0691016267
  • Lietaer, Bernard. 2002. Das Geld der Zukunft. München. ISBN 3570500357
  • Maurer, William. 2005. Mutual Life, Limited: Islamic Banking, Alternative Currencies, Lateral Reason. Princeton University Press. ISBN 0691121966
  • McKinnon, Ronald. 1979. Money in International Exchange: The Convertible Currency System. Oxford University Press. ISBN 0195024095
  • Sumner, William Graham. 2005. A History of American Currency. Cosimo Classics. ISBN 1596050810

External links

All links retrieved July 21, 2013.

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