A currency is a method of payment that’s used in a country or a specific region made up of several countries. Currencies, which are a form of money, are used to pay for services and products and are absolutely essential to today’s society. Without currencies, we couldn’t pay for food, accommodation, and other things that humans need to survive.
Currencies are also extremely important for individual countries since a currency’s exchange rate can have a deep impact on a country’s economy.
The History of Currencies
The use of currency has been tracked all the way back to ancient Mesopotamia 2000 years before Christ. During that time you could bring grains to the local temple and change it with other products. This system was developed in the Middle East and happened because of a surging trade between the Middle East, Europe, and Asia.
A growing international trade soon leads to the introduction of the first coins in history. These coins were made of expensive metals such as gold, silver, and copper, and they each represented their own value in weight.
The first paper money to ever be used was introduced during the Tang dynasty in China about 600 years ago. The reason was that China’s enormous copper resources forced the price of copper to drop. This eventually lead to the coins growing in size to a point where they were impossible to use in everyday life.
To try and fix this issue Chinese leaders introduced a system that let people exchange their coins for bills. The bills were limited to a certain time period and physical area. During that time in history, it was mostly wealthy business owners and religious groups that printed money.
Many historians claim that Sweden was the first country in Europe to establish a currency system using bills in the year 1661. Other experts claim that Spain was the first 100 years earlier.
Two Different Types of Currencies
(Gold) Standard – The use of bills quickly spread across Asia and the Middle East and soon nations were given the responsibility to print money. Since the printed paper money lacked an actual value each country that introduced a currency had to insure the money with a so-called reserve or standard. Gold was used as the standard in most nations but other metals and commodities could be used in place of it.
A standard currency prevents nations from printing money they can’t afford thus protecting the currency from becoming useless. It also means that citizens of any country using a standard currency can bring their money and exchange it for whatever resource that’s being used to insure it. The gold reserve system was the exclusive monetary system in the world for several hundred years.
Fiat money – Fiat money is a term that explains the currency system that is most widely used today. A fiat currency that doesn’t have a standard gets its value because the institution (central bank) that controls the currency says so.
This type of monetary system was used for several time periods (mostly in China) up until the 16th and 17th century before the system was introduced in Europe. Many European countries tried to introduce a fiat currency but most of them failed and were eventually forced back to a standard currency.
Fiat money didn’t really become popular in the western world until the Interwar period. Many of the countries in Europe were suffering from enormous debt due to World War I and had no gold (or other commodities) to keep their currencies secure. In act of desperation, nations started printing money without insuring it which eventually lead to a collapse and a new World War.
Today a majority of the world’s countries implement a fiat currency that only has a value because humans have decided it. Modern-day money would essentially be worthless if it wasn’t for all the laws and regulations that are put in place to protect them.
Here is a collection of currencies that are not using a gold reserve today:
- American Dollar
- Indian Rupee
- Swedish Crown
- British Pound
Today there are more than 178 different currencies being used across the planet. Some of these currencies are more stable and popular than others. The ten most important and stable currencies in the world are:
- American Dollar (USD)
- Euro (EUR)
- British Pound Sterling (GBP)
- Japanese Yen (JPY)
- Chinese Renminbi (CNY)
- Australian Dollar (AUD)
- Canadian Dollar (CAD)
- Swiss Franc (CHF)
- Hong Kong Dollar (HKD)
- Thai Bhat (THB)
Not all of the world’s currencies are stable enough to survive on their own. Sometimes countries are forced to adopt other currencies or collaborate with other countries to create one mutual currency.
A currency can exist in two different versions with two different exchange rates. The first one is called a floating currency exchange rate and its value is based on the market. The other version is a fixed currency exchange rate and its value is based on another value, e.g. a commodity or another currency.
Floating currencies are the most common but there are still a few fixed currencies. Most of today’s fixed currencies are pegged to the price of the Euro. One of the more famous fixed currencies is the Danish krona used in Denmark.
Due to globalization, relationships between different currencies are getting more important. This has lead to some currencies growing bigger and stronger while some currencies are getting weaker and are eventually forced into so-called currency unions. A currency union is an agreement to use the same currency in more than one country.
The most famous currency union today is the eurozone where the euro is used. The eurozone stretches over 19 countries in Europe and includes a total of 340 million people resulting in one of the strongest currencies the world has ever seen.
The euro saved many countries whose currencies had dropped to an almost worthless level in the 1990s. Some of the currencies that were replaced by the euro are the German D-mark (Deutsche Mark), the Italian lira, and the Spanish peseta.
Here are some of the world’s current currency unions:
CFA Franc – The CFA is the name of a currency union including 14 West and Central African countries. 12 of the countries are former French colonies. The union is divided into two currencies (XOF and XAF) with the exchange rate. The only difference between the two currencies is that two different banks print the money.
CFP Franc – CFP is a currency that’s being used in all French territories in the Pacific Ocean including French Polynesia and New Caledonia.
American Dollar – Since the dollar is the leading currency in the world it has been used to stabilize several other nations failing economies. Some of the countries outside of the United States that use the dollar are Cambodia, Ecuador, El Salvador, East Timor, Micronesia, and Panama.
Australian Dollar – The Australian dollar has been used to save nearby countries in similar ways that the American dollar has. At the moment the Australian dollar is the official method of payment in Kiribati, Nauru, and Tuvalu.
How to Trade Currencies
The foreign exchange market, also known as the forex market or currency market, is the biggest market in the world. Forex trading is done with exchange rates, also called currency pairs. It is a speculative investment where your job is to predict what’s going to happen with the price difference between two currencies. For example, you can invest in the currency pair USD/EUR and invest your money that USD will go up in price against EUR or vice versa.
The forex market is a decentralized market meaning that all transactions are done over the counter (OTC). This means that you don’t place your investment on an actual market but instead do it over the internet with another individual and always through forex brokers.
Getting started with currency trading is easy and can be done from the comfort of your own home. We recommend that you read our currency trading guide if you’re interested in getting started with currency trading. Also, these are the best brokers to use:
An alternative currency is a currency that is not connected and regulated by a specific country. Some people say that frequent flyer miles from an airline can be considered an alternative currency. However, we are referring to the new and rapidly growing cryptocurrencies.
Bitcoin is without a single doubt the most well-known of the digital currencies, but there are others such as Ethereum, Litecoin, and Dogecoin.
Cryptocurrencies are also called digital or internet currencies and they all operate “peer-to-peer (P2P), i.e. between two people. One of the most interesting aspects of these new modern currencies is that they have managed to eliminate the need for banks which in turn has reshaped the economic environment.
Currencies of the Future
It will be interesting to follow how our currencies will develop in the future, nevertheless, it would be impossible to predict exactly what will happen. Most experts agree on these three things: currency unions will grow bigger, cryptocurrencies will become more and more influential on the global market, and the forex market will grow even bigger.
There is always a big discussion about what new currencies and currency unions are being created. For a long time, there has been talks of a single centralized African currency that would include all or at least a majority of all African countries. There have also been talks of a new currency in the Gulf States. In addition, there is a movement fighting to unite Canada, Mexico, and the United Stated under one currency.