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Currency

The medium of exchange for goods and services in an economy

What is Currency?

Currency refers to money, that which is used as a medium of exchange for goods and services in an economy. Before the concept of currency was introduced, goods and services were exchanged for other goods and services under the barter system. Bartering made it quite difficult to accurately determine the value of any given good or service or track the evolution in the value of a good/service over the course of time. The development of money as a medium of exchange created a much more efficient economy.

 

Currency

 

By placing a single, monetary value on a good/service, it became much easier to determine its relative value. Currency, thus, became widely used across the globe and facilitated trade between nations.

 

Origin of Currency

The first usage of currency can be traced back to ancient Egypt. During that time, money was used as a form of receipt that represented an individual’s right to claim grain. It was the first time that currency was utilized as a store of value that was backed by some kind of an asset (in this case, grain).

Fundamentally, the store of value was what provided money with a significant advantage over the barter system. Currency’s value was considered stable because it was created and backed by some governmental authority. This meant that it became much more difficult for individuals to manipulate the value of their goods or services, and it became easier to arrive at a consensus around the value of a good or service.

Various bills and coins introduced as established representations of stores of value that were backed by the government. Each country developed its own currency in accord with the cost of living and standard of living in their respective domains.

 

Currency Trading (Foreign Exchange)

As a consequence of buying and selling between people or entities in different countries, there was a need for developing a system for exchanging one nation’s currency for another’s. During the 17th and 18th centuries, Amsterdam was home to the world’s first currency exchange market that enabled international buyers to transact their deals in an official manner.

The foreign exchange, or forex, market is now the largest financial market in the world in terms of the value of all the trading done each day – much larger than any of the world’s stock or bond markets. This is because, in order to conduct business worldwide, it is necessary for companies, individuals, and governments to exchange billions in various currencies every trading day. Forex has become an increasingly popular asset class with investors.

 

Related Readings

CFI is the official provider of the global Financial Modeling & Valuation Analyst (FMVA)™ certification program, designed to help anyone become a world-class financial analyst. To keep advancing your career, the additional CFI resources below will be useful:

  • Forex Trading – How to Trade the Forex Market
  • Foreign Exchange Gain/Loss
  • Gold Standard
  • Paper Economy

Financial Analyst Certification

Become a certified Financial Modeling and Valuation Analyst (FMVA)® by completing CFI’s online financial modeling classes!