What Is Currency?

Currency refers to the paper bills and coins that people use in a country to trade for goods and services. The term is also used broader to refer to the intangible system of value that makes ongoing exchanges possible. In the modern world, currency has replaced bartering as the primary medium of exchange.

The money we use does not have any intrinsic value in itself, but it derives its worth from the trust placed in it by society. This is why it’s important that we don’t allow the money to become degraded or tainted, which would create too much inflation. The paper on a banknote or coin doesn’t have to contain gold or silver, but it needs to be durable enough that it can be used repeatedly.

A currency’s value depends on a number of factors, including gross domestic product (GDP) growth, employment data, and the country’s balance of trade. Strong economic performance attracts foreign investment and can lead to a currency appreciation. Conversely, a country with a large trade deficit will probably experience a currency depreciation.

The amount a currency is worth changes from day to day and hour to hour for a variety of reasons. Some of these reasons include world events, interest rates and aggregate consumer behavior. Investors, such as pension plans and mutual funds, buy and sell billions of dollars’ worth of currency daily to realize a greater return on their investments or holdings. Insurance companies and banks make similar transactions, as they manage the savings of others.