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Currency is money (coins and paper) used to buy goods and services. A broader definition is that money is a claim on human work.

Expanded Definition

Like any other item of value:

  • Currency gains value as demand for it becomes greater than available supply .
  • Currency loses value as demand for it becomes less than available supply.

Another perspective: Money is a claim on human labor.[1] There is a finite amount of work available on the planet, and our money supply represents a constant claim on that work, past, present and future.

Most currency in existence today is fiat currency: it is worth something because we say it is so. It is no longer backed by anything other than the government credit that was used to create it. Money used to be pegged against a particular weight of gold or silver. This is referred to as the gold standard.

In days gone by, most currency was based on precious metals like gold or silver. The US government once issued Gold Certificates and Silver Certificates as paper currency which were convertible to gold or silver (species) on demand. Gold was exchanged at the fixed rate of $35/oz. Contracts once had clauses that required payment of debt in gold. The US withdrew gold from circulation in the 1930s and cancelled all gold clauses. The US abandoned the fixed exchange rate and floated the dollar in the 1970. Today US currency is Federal Reserve Notes. The dollar is backed by the full faith and credit of the US government, but has no other backing. The exchange rate of most currencies now varies with supply and demand on currency exchanges. A few countries like South Korea maintain a fixed exchange rate with the US dollar, but most do not.

Since fiat money is only worth what we agree that it is worth as a society, it has little inherent value (it can't be eaten, or used to build microchips or bicycles). If money is restricted to a particularly scarce and unchanging resource like gold, it can't change value much over time. Fiat money, however increases over time as the banks that create it make more and more. As the amount of money increases in an economy in relation to the amount of work and resources available, you get inflation. Inflation makes every existing dollar worth less in relation to the economy's work product. This is why a movie ticket you bought for $6 in the 1980s cost $10 in the 2000s.

Inflation is similar to the idea that a share split does not affect the underlying value of a company. This presentation has a great explanation of money and money creation.

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