National Currency
The value of a nation's domestic capital.
What Is National Currency?
It is a standard used to denote money or purchasing power parity per unit per instrument. Simply put, it is a function of money in a particular nation. It is the value of a nation's domestic capital.
Every nation needs to facilitate trade, both internally and outside its borders. Currency facilitates this and plays a significant role in our global economic systems.
Money sure did eliminate the barter system and exchange trading, but a standard unit was still required, which suited different conditions and people differently.
So every nation went on and made their medium of exchange; all the trade and commerce were conducted in this unit.
Later, the need for a worldwide medium of exchange arose when the world economy was further interlinked, and globalization became a prominent force as the global economic engine.
It was complicated and next to impossible as not every nation would participate and fully contribute. However, it would also give some advantages to the wealthier countries.
The exchange rates resolved this issue.
A global market was set up to facilitate the exchange of all currencies in circulation on earth. Every currency was given a particular value through which it would be exchanged with each other, one country's currency for another, both in the same value depending upon their exchange rates.
This is how international trade operates today. Economies exchange goods for foreign exchange, a particular amount of the importing nation's notes and coins (or the GRC, i.e., USD) which has the same value as the goods being exported.
History of National Currency
Almost every nation in this world has a currency they use for trade and commerce in their daily lives. We are familiar with the following currencies:
- US Dollar
- Japanese Yen
- Euro
- Indian Rupee
- Chinese Yuan
- Russian Ruble etc.
These are the national currencies of some of the biggest economies in the world. The value of each of these currencies is different and constantly changes in the free market.
It is an essential tool that everyone should understand to know more about global trade and commerce.
The first known currency is believed to be used in ancient Egypt in Mesopotamia. Rice grains were stored in temple shillings and were used as a medium of exchange, mainly for barter transactions.
Coins in metal pieces were first used in India for trade and payments to merchants and the military. Copper was the first metal to be used in the form of coins; silver and gold eventually followed.
The rarity of the metal defined the value of the coin. For example, gold was relatively rare to find than copper and silver; thus, it was valued more than the other two.
It also varied in regions, in Europe where silver was abundant because of huge silver reserves, the value of silver was relatively less.
Bank Notes or Paper Money
The first paper notes resembling instruments are believed to be first used in ancient China after the development of their paper technology. They used it as banknotes and trade tools to facilitate exchange.
Banknotes were preferred over coins as coins back then were heavy and big and were hard to carry around. Back then, technology was not too advanced to have minted small and thin coins. Also, it was made of precious metals, which always had the risk of getting looted.
Paper notes were easy to carry and easy to hide. Although it also had its demerits as follows:
- Paper notes had no intrinsic value of their own, so they could be rejected for payment back then as there was no governing system for currencies and payments as we have nowadays.
- The governments and rulers could print more into circulation anytime, which may create inflationary situations. Anytime the money one holds can become less dear.
Besides, these paper notes took over large hefty coins and became the standard of payments all across the globe. Later after the governments all over the world were somewhat stabilized, trust in fiat money increased manifold.
The Gold Standard
The gold standard was a system wherein the values of major currencies were pegged to the value of gold. For issuing new notes and coins, economies needed to keep a certain fraction of the printable amount as gold reserves in the treasury.
Accordingly, the more gold a nation had, its denominations would have been more vital. Because of this, governments began hoarding piles of gold in their treasury, and it eventually led to the apparent result, a shortage of gold with high demand which led to increasing gold prices all over the world.
This also imposed many restrictions on printing new money for the government, so they automatically disliked it.
Also, many impoverished nations that had attained independence from colonizations were not in a state to follow the gold standard of the Bretton Woods agreement, so they did not become a part of this system, which made it less inclusive.
The US was the only economy running on the gold standard; no other country had adopted this into full force.
When the US inflation started rising in the 1930s and the great depression hit the States, demand for cash grew multifold, and this gold standard system disallowed the government to print more money.
Seeing this, the US government disallowed private holdings of gold and made it a licensed-only commodity. This removed the dollar's peg from gold, but in paper terms, everything remained the same.
In the 1940s, after the allied powers won, the US led the allied forces into the Bretton Woods Agreement, which would have pegged each of the allies' currencies to gold. The US was responsible for determining and controlling the exchange rate of gold to USD.
With time, gold reserves became harder to find, and world trade overgrew, outgrowing the cash in circulation. As a result, people needed more money to facilitate global growth and found this pegging system unsustainable.
The world economies gave up the Bretton Woods system after the US withdrew under President Nixon.
Advantages of Gold Standard are:
- It imposed restrictions on printing new money, so the government had to follow those restrictions and not print blind money into circulation as it does nowadays.
- It stabilized exchange rates of currencies back then as coins used to move 3-4% at maximum in months, unlike now when they are trading at a difference of 3-4% intraday very frequently.
- It also reduced the fear of demand-led inflation as currency had a substantial intrinsic value over the marginal utility of products.
Disadvantages of Gold Standard are:
- Not every country had the same access to gold reserves, which would make it very unfair to many countries having zero to no gold reserves.
- It imposed hefty restrictions on the government to print more money into circulation, which reduced the ability of central banks to interfere and control economic instruments in a crisis.
- Gold is limited in nature, and supply-side inflation in a growing economy could put immense inflationary pressures on the economy.
Digital Currencies
Digital Currencies are the innovation today. After the huge crypto boom from 2008 to 2021, Central Banks worldwide are on high alert. They are planning to release their digital currencies and impose heavy restrictions on existing decentralized coins.
Cryptocurrencies are decentralized systems of software designed to work on a blockchain technology that keeps a record of transactions made through the denominations in a decentralized database that is not accessible only to the people on that blockchain.
They are so much in the news because they are believed to be an innovation in the global payments system all across the globe. Currently, they are used mostly for speculation purposes, but they have a broad use going into the future with globalization on the rise.
Transactions made through crypto coins are hard to track as they are fully decentralized, and the governments and central banks have almost insignificant to no control over them.
They can reduce the grip of central banks over the money supply in the economy, which is the main reason why central banks are planning to introduce their coins in the future.
Many people are using these coins for ill practices. These are used on a large scale to evade tax and to pay for illegal activities like smuggling drugs and illegal substances into the country. As these are not fully traceable and trackable, they can be very dangerous for a country's security.
Despite these issues, many countries like El Salvador have made crypto their fiat currency. They have replaced all their national denominations with crypto, and they hope that the capital appreciation in the value of these instruments will help grow their economy at a rapid pace.
El Salvador is not the only country to move into this space. For example, the Central African Republic is also an African nation that has made crypto its legal tender.
Big economies in other parts of the world are currently experimenting and developing on this issue.
Countries like China have already started using their digital denominations called the "Digital Yuan." The US's Federal Reserve is also working on the Digital Dollar, which would be pegged to the actual world USD, according to a spokesman at the Fed.
Apart from all this, digital currencies will restructure a new world order and truly change the world as we know it now. It is consistently making us move towards a more interconnected world.
National Currency and the Exchange Market
Currencies need to be traded to facilitate international trade. One money needs to be liquid enough into another one so there is no loss or gain due to speculation during the trade.
At the time of the gold standard and the Bretton Woods system, the currencies were exchanged at a relative value to gold. This was also the ancient trade system in India and South Asia, where they used silver instead of gold.
Today, all the currencies are traded concerning the global reserve currency or the US Dollar. But how did the US Dollar become a global reserve currency GRC?
The USD became a GRC under President Nixon when the US abandoned the Bretton Woods system, the US Government was the largest institutional single holder of gold reserves anywhere in the world, and the USD was believed and is still believed to be the most stable currency in the world.
Seeing the problems with pegging currencies to limited and highly undistributed commodities, many countries then pegged their currency to the USD, and that is how it became a GRC.
Hence today, every trade between two countries either involves payments in Dollar terms as it is highly liquified, or it is traded according to the value of other nations' currencies in terms of US Dollars.
For example: If two countries, namely Saudi Arabia and Germany, want to trade, they can either make payments in dollars or first have to convert both their currencies in terms of dollar value and then equate the value of that item into their domestic currencies.
After the trade is made, a nation trades off the other nation's currency obtained during trade and buys either its domestic currency or the USD. This is facilitated through the World Currency Exchange, where Governments and institutions constantly trade currencies in the open markets.
This is how the value of currencies is determined now, and according to the demand and the supply of these instruments, their value is determined by the open market.
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