A currency is a unit of exchange, facilitating the transfer of goods and services. It is a form of money, where money is defined as a medium of exchange rather than e.g. a store of value. A currency zone is a country or region in which a specific currency is the dominant medium of exchange. To facilitate trade between currency zones, there are exchange rates i.e. prices at which currencies (and the goods and services of individual currency zones) can be exchanged against each other.

Typically, each country has given monopoly to a single currency, controlled by a state owned central bank, although exceptions to this rule exist. Several countries can use the same name, each for their own currency (e.g. Canadian dollars and US dollars), several countries can use the same currency (e.g. the euro), or a country can declare the currency of another country to be legal tender (e.g. Panama and El Salvador have declared US currency to be legal tender).

Each currency typically has one fraction currency, often valued at 1/100 of the main currency: 100 cents = 1 dollar, 100 centimes = 1 franc. Units of 1/10 or 1/1000 are also common, but some currencies do not have any smaller units. Mauritania is the only remaining country that does not use the decimal system; the only smaller currency unit is the khoum, which equals 1/5 of a ouguiya (UM).

History

The history of currencies follows the history of money closely. Although any form of Representative money can be considered currency, the term is typically applied to standardized coinage, and the systems that developed from it.

Prior to the introduction of standard coinage, calculating the value of a metal-based money required several steps. First, the metal was tested on a touchstone to calculate the quality, then it was weighed, and then the two values were multiplied. Thus, if someone alloyed gold and lead (which was a common cheating process) the metal's weight was multiplied by the percentage of gold to get the weight of the gold alone.

Coinage was introduced to simplify this process. Coins were created of a set weight and gold quality, and then stamped to prove their worth. No measurement was needed, as long as the original values were known. Of course, one could use an alloy with the same stamp as the coin to cheat, but the stamps were complex and thus difficult to duplicate (at the time).
More modern currency systems developed from the introduction of coins. The process started with the replacement of the original metal, with a coin representing it. The gold itself was kept safe in government vaults. Failure to maintain these stores results in a fiat currency. Examples of this system in the past was the gold standard, where the US Dollar was backed with gold stored at Fort Knox, and the British Pound Sterling, which was backed by one pound of sterling silver at its inception in 1158 in the hands of King Henry II. After WWII, the gold standard was abolished by the Bretton Woods system and many currencies were pegged to the USD.

The evolution continued, first to paper representations of the same standard, and finally to removing the metal altogether - the paper itself is considered to be valuable.

In order to prevent forged currency, various technologies such as watermarks are inserted into most paper currencies. In the early 21st century, the use of RFID tags has been proposed to track bank notes which were illegally obtained. Such efforts have been criticized by privacy advocates and those concerned about theft, because RFID readers are readily available and would reveal who has large amounts of cash.

Modern currencies

To find out which currency is used in a particular country, start at the countries of the world or look at the table of historical exchange rates.

Nowadays ISO have introduced a system, ISO 4217, using three-letter codes to define currency (as opposed to simple names or currency signs), in order to remove the confusion that there are dozens of currencies called the dollar and many called the franc. Even the pound is used in nearly a dozen different countries, all, of course, with wildly differing values. In general, the three-letter code uses the ISO 3166-1 country code for the first two letters and the first letter of the name of the currency (D for dollar, for instance) as the third letter.

The International Monetary Fund uses a variant system when referring to national currencies.

Privately-issued currencies

Several large companies issue points to their customers, to be redeemed for products and services produced by that company. Often, a network of companies will join to share in the offering and redemption of points. While these can hardly be considered stable currency systems, they present many of the same features as "legitimate" currency: they are a store of value, issued in discrete units; they are controlled by a central issuing authority; and they have varying rates of exchange with other forms of currency. For example, frequent flyer miles can be bought using U.S. dollars.

• Frequent Flyer Mile: The most commonly-known points systems are the frequent flyer miles issued by major airlines. The first such system was issued by American Airlines. Other customer loyalty incentives have followed this model, including points systems offered by soft drink manufacturers such as Pepsi. Subway tokens, issued by city transit authorities, can be considered a highly specialized form of currency.
• E-gold: privately issued digital currency backed by gold
• Scrip: is a type of private currency where a certain value is captured, and used to purchase goods from a company. Examples of scrip include gift certificates, gift cards, and Disney
• ollars. However, scrip is not considered a currency in itself, but merely a store of value, denominated in another currency.
• Liberty Dollar: A silver backed currency with a 1 to 1 exchange rate with the American Dollar.

Local currencies

In economics, a local currency is a currency not backed by a national government, and intended to trade only in a small area. Advocates such as Jane Jacobs argue that this enables an economically depressed region to pull itself up, by giving the people living there a medium of exchange that they can use to exchange services and locally-produced goods (In a broader sense, this is the original purpose of all money.) Opponents of this concept argue that local currency creates a barrier which can interfere with economies of scale and comparative advantage, and that in some cases they can serve as a means of tax evasion.

Local currencies can also come into being when there is economic turmoil involving the national currency. An example of this is the Argentine economic crisis of 2002 in which IOUs issued by local governments quickly took on some of the characteristics of local currencies.

World currency

With such developments as the Euro allowing for facilitated trade and perhaps a corresponding increase in a wider identity, proposals for a global currency have accelerated, even while it is recognized that several political and economic factors would need to be addressed and intermediate steps taken before such a concept might be accepted by the diverse nations of the world.