by Stephan Smith on November 20, 2010

This is by far the most popular kind of money the world has ever seen. Well, maybe its behind gold and silver, but currency is definitely up there. I do know, however, that it is the most popular man-made form of money to ever exist. Physical currency or banknotes, as apart from electronic currency, is usually printed on rectangular shaped pieces of paper (or some hybrid of paper).

Banknote currencies can be beautifully designed and packed with an assortment of colors. And if you take a look at all of the various kinds of banknote currencies together, you can very simply create your own rainbow…of pure cash (no pot of gold required) because when I say currencies are colorful, I mean it. But what are they exactly? Who makes them? What’s the history behind the concept of currencies? Sit back, relax, and be prepared to be enlighten. Oh, and SHOCKED!

What’s this Currency Thing in My Pocket?

Being the property of central banks, currencies are one of the most accepted mediums of exchange in the world. They are, in the most simplest sense, money. But before I continue, notice I said currencies are the property of central banks. The currency in your pocket is in your possession, but it is owned by a central bank and ultimately must be returned to a commercial bank or a central bank. When I say that all currency must inevitability be returned to a commercial bank or a central bank, I do not mean a someone’s personal or business bank account, but to a commercial bank’s or central bank’s reserves or private holdings. Why? Because the a great majority of currency (both physical and electronic) is based on debt. Now I know that may be a little confusing, but allow me to explain.

Many Different Currencies

Here are various currencies.

Let’s start at the foundation. All currency that is created starts in a central bank. To make currency available to commercial banks, a central bank purchases government bonds. Well, they usually purchase government bonds, but they can and do purchase other types of assets as well. The currency then makes its way to commercial banks from the deposits of those who received the new currency.

Now that commercial banks have the new currency from its central bank, it can now loan additional currency to businesses and individuals because the commercial banks will now have excess reserves, or in other words, more than enough currency to meet reserve requirements set by the central banks. So the commercial banks loan out the more currency, but wait!

World Currencies

Are some more currencies. See how colorful they are?

Here’s the the interesting part. They don’t loan the new currency they received from the deposits of their clients. Why? Because the commercial banks use that new currency to help them meet its reserve requirement for the non-existing currency. What non-existing currency? The currency that doesn’t exist. I know that this may be confusing and believe me, it’s not the easiest thing to explain. Essentially, the currency that commercial banks lend to businesses and individuals doesn’t exist or rather, it came from nowhere.

That’s right, the currency given to businesses and individuals doesn’t exist. Commercial banks just writes in the books the amount of the loan and credit the accounts of the borrowers. The currency that the businesses and individuals receive is owed back to the commercial banks in full, plus interest. This is the primary way currency is created (via central banks) and expanded (via commercial banks) in an economy. That’s why I said a majority currency is based on debt because central bank created currency is made available through government securities (debt) and commercial bank currency is made available to the public only through loans (debt).

Currencies Coins

Currencies are usually paper, but there are many metal coin currencies as well.

So back to square one. The currency in your pocket, though its in your possession, ultimately will end up back in a commercial bank’s reserves or private holdings because it came into existent through a loan, and we all know that all loans must be paid back. That’s how virtually all currency comes into existence, through loans. Now that you have some idea of what currency is, who makes it and how it is expanded throughout an economy, now its time to talk about the history of currency. What prompted the use currencies anyway?

History of Currency

So why in the world do we use currencies? Whose bright idea was it? Well, in the old days, people in a society used gold to pay for goods and services. They would drag around heavy gold to pay for things they wanted. Can you imagine carrying around 20 pounds of gold everywhere you went? I can’t. That’s where the banks come in. The banks offered storage to anyone who had gold so that they didn’t have to carry it around. And in return the banks provided gold deposit receipts. Currencies originated from those gold deposit receipts. Whenever a person wanted to buy something, they would go to the bank, give the gold receipt to a banker, the banker would give the person the gold and the person would give the gold to the producer of the product or service he or she wanted to buy.

That definitely made buying goods and services a lot more convenient for consumers. As this continued, eventually, consumers would just exchange gold receipts with producers instead of going to the bank to pick up the gold. When that occurred, gold receipts became money. Over time and through various world events (I’ll explain the Gold Standard in another post), the gold receipts that were being used where no longer back by gold but by the government. They stopped being gold receipts and became fiat money or currencies. Please be aware that I am simplifying the history of currencies. This is just to give you an overall idea of how currencies came to be.

List of Popular Currencies

Here is a list of popular currencies.

    United States Dollar
    Canadian Dollar
    British Pound
    Swiss Franc
    Japanese Yen
    Chinese Yuan
    Australian Dollar
    New Zealand Dollar

Currencies are to a country like stocks are to a business. Currency (stock) valuation fluctuates depending on the economic political situation of the country (business) they are derived from.

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