A
currency is a unit of exchange, facilitating the transfer of
goods and services. It is a form of money, where money is an efficient
medium of exchange, and it is also considered by several people as
a store of value, created through a claim to its central bank assets.
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. Currencies can be classified as either floating
currencies or fixed currencies based on their exchange rate regime.
In common usage, currency sometimes refers to only paper money, as
in "coins and currency", but this is misleading. Coins and
paper money are both forms of currency.
In most cases, each country has monopoly control over the supply and
production of its own currency. Member countries of the European Monetary
Union are a notable exception to this rule, as they have ceded control
of monetary policy to the European Central Bank.
In cases where a country does have control of its own currency, that
control is exercised either by a central bank or by a Ministry of
Finance. In either case, the institution that has control of monetary
policy is referred to as the monetary authority. Monetary authorities
have varying degrees of autonomy from the governments that create
them. In the United States, the Federal Reserve operates without direct
interference from the legislative or executive branches. It is important
to note that a monetary authority is created and supported by its
sponsoring government, so independence can be reduced or revoked by
the legislative or executive authority that creates it. However, in
practical terms, the revocation of authority is not likely. In almost
all Western countries, the monetary authority is largely independent
from the government.
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. For example, Panama and El
Salvador have declared US currency to be legal tender, and from 1791-1857,
Spanish silver coins were legal tender in the United States. At various
times countries have either restamped foreign coins, or used currency
board issuing one note of currency for each note of a foreign government
held, as Ecuador currently does.
Each currency typically has one fractional currency, often valued
at 1/100 of the main currency: 100 cents = 1 dollar, 100 centimes
= 1 franc, 100 pence = 1 pound. Units of 1/10 or 1/1000 are also common,
but some currencies do not have any smaller units. Mauritania and
Madagascar are the only remaining countries that do not use the decimal
system; instead, the Mauritanian ouguiya is divided into 5 khoum,
while the Malagasy ariary is divided into 5 iraimbilanja. However,
due to inflation, both fractional units have in practice fallen into
disuse.
See Non-decimal currencies for other (mostly historic) currencies
with non-decimal divisions.
Courtesy
of: www.wikipedia.org