Money is a general system of value that enables the ongoing exchange of goods and services in a society. Although it has taken many forms, today it most commonly exists as coins and paper notes issued by a country. Its value derives from the trust people place in it. As long as it is widely accepted, currency has a degree of stability that allows people to plan and save.
Historically, currencies have been backed by a commodity that has intrinsic value (e.g. gold coins, copper ingots) or a government decree, known as fiat money. However, the latter has its own set of problems. For example, the printing of paper notes without corresponding specie increases the money supply and generates inflationary pressures. Moreover, the printing of notes also carries associations with wars and other military expenditure. As a result, there was great hostility toward paper money in Europe and America.
In a world of globalization, the idea of a single, stable form of currency has gained popularity. However, a centrally managed global currency would limit the flexibility of individual countries in responding to economic shocks. This is why the majority of countries maintain their own currencies.
Different currencies are rarely, if ever, exactly equal in value. Therefore, an exchange rate must exist that enables the trading of one currency for another. This exchange is facilitated by the foreign exchange market, where trillions of dollars are traded each day. If a major country’s economy suffers, its currency will typically fall against the major currencies used in international trade. Conversely, if an economy is growing, its currency will rise against the major currencies.
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