When your parents and grandparents were your age, seeing a movie cost only a nickel and gas was 30 cents a gallon. Today, that same movie costs $8 and a new car will set you back well over $15,000. In short, prices have risen, and this is what we call inflation. Inflation occurs when the money supply grows faster than a country’s economy, and that means each currency unit has less value than it did the year before. Moderate inflation is normal, but extreme, unchecked inflation can make saving for future needs difficult.
While currency refers to the physical paper notes and coins issued by a country, it also represents an intangible system of value used for a variety of purposes. The most important functions are as a medium of exchange, a store of value, and a unit of account.
Currency originated in prehistoric times, when metals like copper, silver, and gold were shaped into coins and traded for goods. These coins established a unit of account, ensuring the individual receiving a coin received the exact amount of the precious metal it represented (the “metallic standard”). This facilitated trade and led to banking.
Some countries choose to link their currency with the value of another widely-used currency, such as the US dollar or the euro. These currencies are known as pegged currencies. Others have a floating rate, where the currency’s value is based on market factors. The floating rates are more likely to attract investors, but they can be subject to wild swings if the economic or political stability of the issuing country’s economy and government declines.
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