In the field of economics, currency refers to a specific currency of a nation like the US dollar, or to the banknotes and coins of a specific currency, which contains the physical aspects relating to a country’s money supply.
Throughout different periods of history, money in currency form has predominated. Earlier gold or silver coins having intrinsic value were used as monetary unit or commodity money. In contrast to this, modern currency is intrinsically of no value. The predominance of one form of currency over some other in monetary unit system has grown due to the government designating through decrees, that just the specific monetary units will be accepted in tax payments.
Production and control of currency
In majority of cases, every private central bank has the sole control over the production and supply of currency. For facilitating trade between different currency zones, exchange rates have been developed. Exchange rates refer to the prices with which currencies may be exchanged against one another.
Currencies may be classified as floating currencies or fixed currencies according to their regime relating to exchange rate. Floating currencies are those which make use of a floating exchange rate. United States dollar, the Euro, the British pound, the Japanese Yen, the Swiss Franc, the Canadian dollar and the Australian dollar are examples of floating currencies. A fixed currency refers to the value of a currency which is matched to another single currency’s value, to a group of other currencies or to a different measure of worth, like gold. This is done for stabilizing the currency’s value against that currency which it is pegged to, thus helping in easier trade and investments between two countries.
In case of those countries which have control over its individual currency, a central bank or a Ministry of Finance does this job of exercising control. The institution is called the monetary authority. In the United States, the monetary authority is the Federal Reserve System which operates independent of the legislative and executive branches.
Use of currencies in different countries
Sometimes several countries use the identical name in respect of their own currencies, like “dollar” in both U.S.A and Canada. A particular country may also claim the currency of some other country to be a legal tender. As an example, Panama and El Salvador have considered U.S. currency as a legal tender.
Every currency typically contains the primary currency unit like the U.S. dollar, or the Euro, and a fractional currency. The latter is frequently valued at 1/100 part of the primary currency. Thus 100 cents is equal to 1 dollar, 100 centimes is equal to1 franc, and 100 pence is equal to 1 pound. Units of 1/10 or 1/1000 are also commonly found. Icelandic krona does not have smaller units.
Presently, the International Organization for Standardization has started the system of three–letter codes (ISO 4217) for defining currency in contrast to currency signs or simple names. This has been done with a bid to removing confusion with regard to existence of several currencies called dollar, or several others by the name of Franc.