What determines the value of a currency? A puzzling question worth considering, as people around the world are using currency every day yet negligible numbers of them comprehend money itself. How the value of a currency is determined is perhaps the most bewildering aspect of money. Every nation has means of defining the value of currency taking a plethora of aspects into account.
Currencies have been there as long as human societies, providing the inception of the human race. Defined by Investopedia, “Money, in and of itself, is nothing.” is indeed accurate, specifically when considering the wide range of mediums used for monetary transactions all through the epochs: animals, metal, plastic, paper and even nothing like digital currency! Since the emergence of modern humans, people swapped: in the sense that they exchanged one thing for another that they reckoned equivalent, paving the way for the modern exchange rate mechanism.
The origin of using livestock as a form of currency like cow, camels or sheep dates back to roughly between 9000 B.C.- 6000 B.C. As these animals provide labour, food and carriage, their worth was apparent between the people who bartered them for good and facilities. Cowrie shells, mollusc normally found in the Pacific and Indian Oceans, were first used as currency in China around 1200 B.C. Cowrie shells to this date are known for being the most widely used currency in human history.
Debuted in 500 B.C., modern coinage was created from precious metals like gold, silver and bronze and was imprinted with images of gods, monarchs and other vital authorities both to mark their legitimacy as well as claim the money for the specific ethos just like our money today. Between the uses of fur as legal tender in 118 B.C. to the Gold Standard in 1816, the journey of currency can be duly acknowledged.
Demand in most cases governs the value of a currency. To measure the value of a currency, three main ways include:
- Measured by Exchange Rate: The buying capacity of a currency with foreign currencies?
- Value of Treasury Notes: Through measurements, the value of the currency rises when the demand for Treasury is high.
- Foreign Exchange Reserves: The amount of currency foreign governments held.
With time, the value of currency varies. The growth and drop of any given economy, time and other factors affect the value of currency considerably. Despite the wide range of determiners affecting the value of a currency, there are widespread standards that help decide the value of a currency including:
- Interest Rates: The higher the rate of interest, the stronger a currency in any economy. When foreign investors get a higher return on their investment, they are more willing to do business with the country.
- Economic Policy: Although relative to the currency and the country it belongs to; economic policies can help make a currency stronger.
- Stability: Based on the economic stability of a country, foreign investors get attracted to invest, resulting in a rise on the strength, or value, of a currency.
In a nutshell, strength, stability and how the exchange rates measure up are arguably the most impactful ones out of the many variables that affect the value of a currency.
The worth of a piece of money between two or more countries is what exchange rates help to determine. The purchasing power of a dollar is higher than that of Euro or Japanese Yen. During the Great Depression, the traditional determiner, set after the gold standard of exchange rates was demolished and a “floating currency exchange” was introduced.
No matter where you work, be it in Wall Street or a local SME, exchange rates play an instrumental role in your day-to-day life. For instance, if you live in the United Kingdom and are travelling to the USA for a vacation, the exchange rate between USD and GBP matters. Contrarily, while visiting a country where your currency won’t be much of a use, exchange rates essentially determine your purchase limitation as you travel, work, do business, or move to a new country permanently.
The value and demand of a currency may change as we move into the future. Experts opine, the use of electronic money or digital money to be the future we are heading towards. We are already witnessing the age of Bitcoin, cashless payment methods, and plenty of apps that allow individuals to buy, sell, and process money for goods and services, whether they are in the same room or a different country. As long as the electronic money is concerned, different types of currency are hardly an issue as these transactions are controlled using technology alone. Are we looking at a future where coins and paper money will soon be obsolete? Although doubtful about the chance in the near future, be assured that the value of currency regardless of how it is determined and how we live with it, will be shifting constantly.