Currency is the heartbeat of transactions, allowing us to exchange value without trading coats for bread (as was done in times past). It’s also the unit of account to compare the price of goods and services, and a store of value to make purchases now or in the future. It’s important to be currency-savvy, especially as we move from a world of physical money to digital payments and cryptocurrencies like Bitcoin.
The term currency is often used interchangeably with the terms money and gold. However, they’re not the same. Money is a broader concept that refers to anything that people agree has value, from paper bills and coins to airline and credit card points. In fact, if you say “daddy-o” in the 1950s, you’d get a strange look because hardly anyone uses that word anymore.
Generally, currencies are backed by either the economy of a country (the underlying economic fundamentals that guarantee its value) or a precious metal. Some countries choose to peg their currency to another, such as the US dollar or euro. The other option is for a country to adopt a floating currency regime. The value of a currency is then determined in the forex market, based on a combination of factors such as interest rates, inflation, GDP growth, political events and trade balances. It can also be influenced by supply and demand for that currency, as well as the level of foreign reserves held by other nations.