The term “currency” refers to a medium of exchange for goods and services in an economy. Typically, it is a government-issued legal tender or fiat money and can take the form of paper and coins or virtual currencies like Bitcoin. Historically, commodities like gold or diamonds have also served as a form of currency. Ultimately, the value of a currency comes from its perceived worth in trade. There are about 180 well-established currencies in the world today.
The basic function of currency is to make it easier for people in a society to trade with one another. The existence of a common medium of exchange allows people to spend and save confidently, as they know that whatever they hold will have a predictable value in the future.
Ideally, money should be fungible, meaning that units of it are interchangeable for the same amount of the commodity it represents. This reduces transaction costs by eliminating the need to evaluate each good on its own merits before it can be traded. The first types of currency were precious metals like gold and silver. Later, other commodities that have a high demand and utility, such as tobacco or instant noodles, became market-determined currencies.
The modern world’s most widely-used currencies are the U.S. dollar, the Euro, and the British Pound Sterling. However, most countries have their own domestic currency that they manage independently of the rest of the world. A few countries choose to peg their currency’s value to a more commonly-used foreign currency, like the U.S. dollar or the Euro, to help maintain stability for investors and to encourage the export of their goods abroad.