How is currency used

These are some of the reasons why minted currency was an important innovation. As far back as B. Metallic money in the form of coins made from precious metals such as gold, silver, or copper have been commonplace since early civilization. Other forms of currency that have existed include large circular stone in the Pacific Islands, cowrie shells in pre-modern America, tobacco leaves, measurements of grains or of salt, or even cigarettes and packages of ramen noodles in prisons. More recently, technology has enabled an entirely different form of payment: electronic currency.

Today, electronic payments and digital money is not only common, but has become the most important and ubiquitous money form. However, it retains its worth for one of two reasons. The dollar fell into this category in the years following World War II, when central banks around the world could pay the U.

In other words, it holds value simply because people have faith that other parties will accept it. Today, most of the major currencies around the world, including the euro , British pound and Japanese yen, fall into this category.

Fiat money moreover derives its value from the trust in the government and its ability to levy and collect taxes. While currency technically refers to physical money, financial markets refer to currencies as the units of account of national economies and the exchange rates that exist across currencies.

Because of the global nature of trade, parties often need to acquire foreign currencies as well. Governments have two basic policy choices when it comes to managing this process. The first is to offer a fixed exchange rate. Here, the government pegs its own currency to one of the major world currencies, such as the American dollar or the euro, and sets a firm exchange rate between the two denominations.

The main goal of a fixed exchange rate is to create a sense of stability, especially when a nation's financial markets are less sophisticated than those in other parts of the world. Investors gain confidence by knowing the exact amount of the pegged currency they can acquire if they so desire.

However, fixed exchange rates have also played a part in numerous currency crises in recent history. This can happen, for instance, when the purchase of local currency by the central bank leads to its overvaluation. The alternative to this system is letting the currency float. Instead of pre-determining the price of foreign currency, the market dictates what the cost will be. The United States is just one of the major economies that uses a floating exchange rate.

In a floating system, the rules of supply and demand govern a foreign currency's price. Therefore, an increase in the amount of money will make the denomination cheaper for foreign investors. And an increase in demand will strengthen the currency make it more expensive. Suppose the dollar gained value against the yen. Suddenly, Japanese businesses would have to pay more to acquire American-made goods, likely passing their costs on to consumers.

This makes U. Most of the major economies around the world now use fiat currencies. While this provides greater flexibility to address challenges, it also creates the opportunity to overspend. The biggest hazard of printing too much money is hyperinflation. With more of the currency in circulation, each unit is worth less. This page was last updated in July and is no longer being updated. The Federal Reserve Banks distribute new currency for the U.

Treasury Department, which prints it. Depository institutions buy currency from Federal Reserve Banks when they need it to meet customer demand, and they deposit cash at the Fed when they have more than they need to meet customer demand. The amount of cash in circulation has risen rapidly in recent decades and much of the increase has been caused by demand from abroad.

The Federal Reserve estimates that the majority of the cash in circulation today is outside the United States. Meeting the Variable Demand for Cash The public typically obtains its cash from banks by withdrawing cash from automated teller machines ATMs or by cashing checks.

The amount of cash that the public holds varies seasonally, by the day of the month, and even by the day of the week. For example, people demand a large amount of cash for shopping and vacations during the year-end holiday season. Also, people typically withdraw cash at ATMs over the weekend, so there is more cash in circulation on Monday than on Friday.

To meet the demands of their customers, banks get cash from Federal Reserve Banks. Most medium- and large-sized banks maintain reserve accounts at one of the 12 regional Federal Reserve Banks, and they pay for the cash they get from the Fed by having those accounts debited. Besides serving as a substitute in trades, money 's other important use is as a store of wealth. In a straight barter system, the commodities being traded are generally perishable.

You can gather tons and tons of wheat by making shrewd trade deals, but if you try to save the wheat, it will eventually go bad. Money allows people to accumulate wealth. This had an enormous impact on civilization, because it meant that power wouldn't always be passed through families. People who had been excluded from any possibility of holding political power could amass wealth through trade or by providing a service.

That wealth could then be used to purchase political or even military power. So money made civilization more democratic by taking some power out of the hands of noble families that had monopolized it for hundreds of years. The forms and functions of currency have changed over the last 3, years or so, generally falling into four categories:. The development of commodity-based currency systems represents more of a blurring between barter systems and later currency systems than a revolutionary change.

In a commodity system, the money used is not only a "place-holder" for purchasing power, but it is something that has an inherent value by itself. A good example of a commodity system is the one used by the Aztecs. They placed great value on cacao beans, which could be used to make chocolate. The beans were small and easy to carry, so they were often used to balance out or make change in barter agreements. The benefit of commodity money, according to anthropologist Jack Weatherford, is that, "unlike paper money and cheap coins that can easily lose their face value, commodity money has a value in and of itself and thus can always be consumed no matter what the status of the market.

There are still drawbacks to commodity money. It is often perishable and bulky. Cattle were used frequently as commodity currency in agrarian societies. They worked well as a medium of trade, because everyone in that society placed value on them but they were hard to transport. The value of a commodity currency seldom extends beyond the borders of the culture that uses it. If a herder from the country wants to trade with a city dweller, his cattle aren't going to have much value.

European explorers dumped entire boatloads of cacao beans because they didn't value them like the Aztecs did. The first coins were minted in Lydia, an ancient empire in the area of modern Turkey. The Lydian king Croesus started making small metal ingots stamped with an imperial emblem around B. This Lydian custom spread to the Greeks and eventually to the Romans.

Coins were usually made of silver or gold, and their value was enforced by the authority of the government that issued them. If the Athenian officials declared that all coins minted in Athens, with the official stamp of Athens, were 97 percent silver, then those coins would be traded at that value.

In China, coins developed at about the same time that they did in the West. In the fifth century, B. The metal blades had a round hole at one end, so the money could be strung onto a rod or rope.

Eventually, the tools became more stylized. Over the years, they became smaller and smaller, until only the round end with a hole in it was left. These round, pierced Chinese coins remained virtually unchanged until the s. An important effect of coins was that governments now controlled the release of money into the market.

They could also manipulate the money supply. This was done by various Roman emperors, who would reduce the precious metal content of Roman coins when they needed money. They figured that if a ton of gold made 10, gold coins, they could have twice as many coins by cutting the gold content in half. Instead of making the emperors richer, the constant devaluation of Roman coins -- and the resulting instability of the Roman economy -- is one of the factors that led to the fall of the Roman Empire.

When Rome fell, most of Europe returned to a more primitive, feudal system of economy. Throughout the Dark Ages, people became distrustful of coins, and that currency fell out of use. Coinage wouldn't return until the Renaissance. When the U. Mint creates coins, seigniorage -- the difference between the value of money and the cost of its production -- means instant profit.

According to the U. Mint, it only takes a few cents to mint a quarter , but the quarter is instantly worth 25 cents. That difference is the money that keeps the mint running. Paper money was developed first by the Chinese, who used stag skins, bark, or parchment marked with the imperial seal as "bills of payment. Paper money had trouble gaining acceptance in Europe.

Currency in some form has been in use for at least 3, years. Money, usually in the form of coins, proved to be crucial to facilitating trade across continents. A key characteristic of modern money is that it is uniformly worthless in itself. That is, bills are pieces of paper rather than coins made of gold, silver, or bronze. The concept of using paper as a currency may have been developed in China as early as BC, but the acceptance of a piece of paper in return for something of real value took a long time to catch on.

Modern currencies are issued on paper in various denominations, with fractional issues in the form of coins. According to WorldAtlas. Another 66 countries either use the U. Most countries issue their own currencies. For example, Switzerland's official currency is the Swiss franc, and Japan's is the yen. An exception is the euro , which has been adopted by most countries that are members of the European Union. Some countries accept the U.

For some time after the founding of the U. Mint in , Americans continued to use Spanish coins because they were heavier and presumably felt more valuable. There are also branded currencies, like airline and credit card points and Disney Dollars. These are issued by companies and are used only to pay for the products and services to which they are tied.

The exchange rate is the current value of any currency in exchange for another currency. This rate fluctuates constantly in response to economic and political events. Those fluctuations create the market for currency trading.