Currency is a medium of exchange for goods and services.
In industrialized nations, currency primarily consists of bank notes and government-issued paper money and coins. In less-developed societies, currency can be other exchange media, such as livestock, tobacco and animal pelts. Currency is generally issued by a government and widely accepted as a form of payment. In most parts of the world, currency has replaced bartering as the preferred way of trading goods and services. Money represents the value of goods and services, whereas currency is the medium used to exchange that value.
Foreign exchange trading, or forex trading, is the act of trading the currency of one country against the currency of another. Each currency available for forex trading is listed via a three-letter code similar to a stock ticker. Traders who wish to speculate that the value of the U.S. dollar is going to drop relative to the euro would trade that thesis by buying the EUR/USD. The following forex “major pairs” make up the majority of global daily forex trading: euro/U.S. dollar, British pound/U.S. dollar, U.S. dollar/Japanese yen, U.S. dollar/Swiss franc, U.S. dollar/Canadian dollar, Australian dollar/U.S. dollar and New Zealand dollar/U.S. dollar.
Fiat money is a currency that is established as legal tender and backed by a government but which has no intrinsic value. In the past, many global currencies, including the U.S. dollar, were backed by gold or other physical commodities. Until 1933, the U.S. was on the gold standard, meaning every U.S. dollar could be redeemed by banks for physical gold.
Instead of being backed by commodities, the values of fiat currencies are supported by the creditworthiness of their issuing governments, as well as supply-and-demand dynamics.
A reserve currency is a currency held in large quantities by governments and institutions as a store of value and to facilitate international payments. Reserve currencies help governments and central banks participate in the global economy, and they must be liquid, stable, easily accessible and held by monetary authorities in large quantities. Since the middle of the 20th century, the U.S. dollar has been the world’s preferred international reserve currency.
Private currencies are types of currencies issued by private organizations rather than central governments. For example, much of the paper currency used in the U.S. in the 1800s consisted of private bank notes.
The most popular modern private currency is cryptocurrency. Bitcoin (BTC), Ether (ETH) and other cryptocurrencies are digital currencies secured by decentralized computer networks. Like fiat currencies, cryptocurrencies can be used as a store of value or as a means of exchange. However, instead of being backed by a federal government, cryptocurrencies are secured via blockchain technology that relies on a network of nodes to independently verify each transaction and record it on a public ledger.
The first known form of currency dates back to about 5,000 years ago when the Mesopotamians created the shekel coin. Gold and silver coin mints date back to between 650 and 600 B.C. when Lydia and Ionia elites used stamped coins to pay army soldiers. Roman, Islamic, Indian and Chinese coins circulated widely along trade routes from 1250 B.C. through 1450 A.D. China first used paper money bank notes as currency in about 800 A.D.
In the U.S., the first paper currency was issued by the Massachusetts Bay Colony in 1690. Congress passed the Mint Act in 1792, which established the U.S. coinage system and the dollar as the official currency. The first U.S. coins were minted in 1793, but the first government-issued paper money was not printed until 1861.
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