Money enables us to buy and sell goods and services. It replaced the barter system of trading one commodity for another, such as trading a coat for bread, because it offers convenience, speed, and reliability, which facilitates trade. Modern currency takes many forms, from coins and paper notes to cryptocurrencies like Bitcoin. There are more than 200 national currencies in the world, and they fluctuate in value, often based on global economic factors.
Currencies are typically created by a country’s government to fulfill specific monetary functions. They may be backed by precious metals (such as gold, silver, and copper) or they can be fiat currencies such as those issued by the United States or European countries. They also can be a combination of both fiat and precious metals, as the Thirteen Colonies did when they first started to use their own paper money after the American Revolution.
Historically, money was measured by the amount of metal it contained. Coins were mined, weighed, and stamped with the required weight of precious metal to ensure their worth. This led to the development of the unit of account and helped promote the growth of banking.
The concept of a dollar, for example, is an internationally recognized form of currency that has become the main reference point for global monetary policies. A country’s currency can also be defined relative to other currencies, with an exchange rate establishing the price of its domestic currency in terms of foreign currency. Exchange rates can be floating or fixed, with the latter requiring central banks to intervene in the market to balance supply and demand at a constant price.