Currency embodies the intangible system of value that facilitates trade in goods and services. The concept long ago replaced the barter system, whose flaws included a lack of security and difficulty keeping track of exchanges. It enables a wide range of economic transactions because of its fungibility, durability, portability, and recognizability. Currently, there are over 200 national currencies in circulation. The most recognized are the U.S. dollar, the euro, and the British pound. There are also emerging technologies like cryptocurrencies, which have not yet been adopted as official currencies.
Early currencies were metal coins minted to represent value stored in temple granaries in Sumer and ancient Egypt. These coins were weighed and stamped to ensure each coin contained the same amount of precious metal, giving individuals confidence that they could exchange one for another. Later, authorities began printing paper notes rather than using specie as a backing. This increased the money supply and inflated prices, leading to inflationary pressures and distrust. Inflation erodes a country’s purchasing power, so domestic consumers demand foreign goods instead, which causes the country’s currency to depreciate.
Today, most currencies constantly fluctuate (or “float”) based on supply and demand in the global market. An exchange rate, such as EUR/USD, indicates how many US dollars are worth for each euro. This is determined by market forces, including consumer demand and a country’s economic health. Monetary policies and interest rates, such as those set by the European Central Bank (DNB), play an important role in a currency’s stability.