Currency
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2008-07-14T08:17:30Z
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/* Paper money era */
{{for2|current [[exchange rate]]s|[[Exchange rate#External links|exchange links]]}}
{{Numismatics}}
A '''currency''' is a [[Medium of exchange|unit of exchange]], facilitating the [[trade|transfer]] of [[goods]] and/or [[Service (economics)|service]]s. 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 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.
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]].
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.
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.
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 sterling|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 [[Madagascar|Malagasy]] [[Malagasy ariary|ariary]] is divided into 5 [[iraimbilanja]]. However, due to [[inflation]], both fractional units have in practice fallen into disuse.
See [[non-decimal currencies]] for other (mostly historic) currencies with non-decimal divisions.
== History ==<!-- This section is linked from [[Shekel]] -->
=== 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 BC. 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 civilization|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 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.
=== 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]]).
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.
=== Era of hard and credit money ===
In [[History of China|premodern]] [[China]], the need for credit and for circulating a medium that was less of a burden than exchanging thousands of [[copper]] coins led to the introduction of [[banknote|paper money]], commonly known today as [[banknote]]s. This economic phenomenon was a slow and gradual process that took place from the late [[Tang Dynasty]] (618–907) into the [[Song Dynasty]] (960–1279). It began as a means for merchants to exchange heavy coinage for [[receipt]]s of deposit issued as promissory notes from shops of [[wholesaler]]s, notes that were valid for temporary use in a small regional territory. In the 10th century, the Song Dynasty government began circulating these notes amongst the traders in their [[monopoly|monopolized]] salt industry. The Song government granted several shops the sole right to issue banknotes, and in the early 12th century the government finally took over these shops to produce state-issued currency. Yet the banknotes issued were still regionally-valid and temporary; it was not until the mid 13th century that a standard and uniform government issue of paper money was made into an acceptable nationwide currency. The already widespread methods of [[woodblock printing]] and then [[Bi Sheng]]'s [[movable type]] [[printing]] by the 11th century was the impetus for the massive production of paper money in premodern China.
At around the same time in the [[Islamic Golden Age|medieval Islamic world]], a vigorous [[monetary economy]] was created during the 7th–12th centuries on the basis of the expanding levels of circulation of a stable high-value currency (the [[dinar]]). Innovations introduced by Muslim economists, traders and merchants include the earliest uses of [[Credit (finance)|credit]],<ref>Jairus Banaji (2007), "Islam, the Mediterranean and the rise of capitalism", ''Journal Historical Materialism'' '''15''' (1), p. 47–74, [[Brill Publishers]].</ref> [[cheque]]s, [[promissory note]]s,<ref>Robert Sabatino Lopez, Irving Woodworth Raymond, Olivia Remie Constable (2001), ''Medieval Trade in the Mediterranean World: Illustrative Documents'', [[Columbia University Press]], ISBN 0231123574.</ref> [[savings account]]s, [[transactional account]]s, [[loan]]ing, [[trusts]], [[exchange rate]]s, the transfer of credit and [[debt]],<ref>Subhi Y. Labib (1969), "Capitalism in Medieval Islam", ''The Journal of Economic History'' '''29''' (1), p. 79–96 [93].</ref> and [[banking institution]]s for loans and [[deposit account|deposit]]s.<ref>Subhi Y. Labib (1969), "Capitalism in Medieval Islam", ''The Journal of Economic History'' '''29''' (1), p. 79–96 [81–84].</ref>
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.
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]].
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.
=== Legal tender era ===
{{worldwideview}}
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).
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 [[Bimetallism|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 [[United States Note|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.
=== Paper money era ===
A currency needs to satisfy 3 functions to become a true representation of transactions between living beings.
1. Medium of exchange
2. Store of value
3. Delivery of value (energy)
For paper currencies to be valid the issuer should be able to deliver "value / energy" on redemption of currency, otherwise paper currency has no mechanism to satisfy the "3. Delivery of value" function to be real currency. This means that Reserve Banks should have "energy reserves" to be called Reserve Banks.
{{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]].
== Modern currencies ==
[[Image:Moneybillscoins3.jpg|thumb|250px]]
To find out which currency is used in a particular country, check [[list of circulating currencies]].
Currently, 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 [[List of countries using 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.
The [[International Monetary Fund]] uses a variant system when referring to national currencies.
:''For exchange rates, see [[exchange rate]] and [[tables of historical exchange rates]].''
== 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.
== See also ==
{{portalpar|Numismatics|United States penny, obverse, 2002.jpg}}
*[[Exchange rate]]
*[[Foreign exchange market|Foreign exchange]]
*[[Foreign exchange reserves]]
*[[Optimum currency area]]
*[[History of money]]
*[[World currency]]
=== Accounting units ===
*[[Franc Poincaré]]
*[[Special Drawing Rights]]
*[[European Currency Unit]]
*[[Currency sign]]
*[[Krugerrand]]
*[[Fictional currency]]
*[[Local currencies]]
*[[Petrocurrency]]
*[[Currency pair]]
=== Lists ===
* [[List of currencies]]
* [[List of circulating currencies]]
* [[List of historical currencies]]
* [[List of fictional currencies]]
* [[List of motifs on banknotes]]
* [[List of international trade topics]]
* [[List of historical exchange rates]]
==References==
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[[Category:Currency| ]]
[[Category:Foreign exchange market]]
[[ar:عملة]]
[[an:Dibisa]]
[[be-x-old:Валюта]]
[[bar:Währung]]
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[[bg:Валута]]
[[ca:Moneda]]
[[cs:Měna]]
[[cy:Arian cyfred]]
[[da:Valuta]]
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[[es:Divisa]]
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[[fa:واحد پول]]
[[fo:Gjaldoyra]]
[[fr:Devise (monnaie)]]
[[fy:Munt]]
[[ga:Airgeadra]]
[[gl:Divisa]]
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[[hr:Valuta]]
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[[ia:Numerario]]
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[[ru:Валюта]]
[[simple:Currency]]
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