The reason cross border payment services work is different countries have currencies that are worth different amounts. Foreign currency seems to be worth different amounts as they are entirely separate currencies. One pound is close to one frank, but it is worth over a hundred yen. It might be hard to understand, but remember that the countries have different histories.
Let us start with dispelling the myth that low-value foreign currency means countries with inflation issues. There is a joke about Zimbabwe money being worth countless Pounds. It does not mean that a high-value currency is a strong currency. A low value does not mean weak. If it did then Kuwait would have the best currency-value in the world. Furthermore, Iran would have one of the worst currencies in the world. The Kuwaiti dinar is worth more than 138 thousand Iranian rials.
It does not mean that Kuwait’s economy is 138 thousand times better than that of Iran. On the contrary, Iran’s economy is bigger and better if you ask some people.
But why is the difference so vast when comparing foreign currencies? You see the relative values do not represent the stability or the value of money as a whole.
What Does Currency Represent?
We have to go back in time because the history of currencies went through a chain of events. We went from barter to having gold, and then we had notes and then nation-wide currencies.
We ended up having a currency which was always worth something until recent times. One of the changes that came is that most currencies stopped being fixed against gold.
If the currency was not worth a certain amount of gold, then why would you trust it? We have seen Zimbabwe or Venezuela unable to trust their currency as their governments could print endless amounts of money.
When we got out of the gold standard, currencies became worth different amounts relative to each other.
Currency Exchange Rate
Pretty much every single currency can now freely flow against one another. Value of money changes with every foreign currency daily.
Every currency has an exchange rate with currencies all around the world. It means that there are different units and different values.
Crazy Foreign Currency
The Mexican peso is less than the Canadian dollar, but they have some rough value to each other. But why are the Iranian rial and Indonesian rupee worth so little compared to the British pound?
There are three explanations to this phenomenon.
- One is that many countries have gone through inflation in their past like Indonesia.
- Another explanation is that some currencies do not have a unit for a hundred of something. For instance, the yen does not have a unit to find a hundred yen. Instead, you keep counting yen off that point. On the other hand, the Great British pound subdivision of units. Most people think that if they go to Japan, they are rich if they take a few thousand pounds. But that is not true as prices adjust and it does not matter to the market what currencies are worth. You will see a few pounds buy a lot whereas it requires thousands of units in another currency.
- The values of currencies change over time and they are worth different amounts because they have no reason to be linked together. There was no universal point where we all agreed to one unit of money across the world with the same value.
Nations have started at different points and have gone through movements like inflation, deflation, increase and decrease of demand for currencies etc. people got used to their local changes. So honestly it would be stranger if the world has a universal currency. It is like asking for a universal language that every country or even isolated tribes understand.
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