What Gives a Currency Value?

Governments monitor money production and distribution to help regulate currency values.

In the world market, most currency has no fixed worth, resulting in value fluctuations. In many countries, the currency system is based on the government's assurance that the currency has value and the people's belief that the currency will be worth something when they go to spend it.

History

The value of early coins depended on the type of metal they were made of and how much metal they contained. Until the 1970s, U.S. currency was tied directly to the value of and backed by gold. The U.S. stopped using the "gold standard" when demand for gold exceeded the supply.

Value

The fiat, or government-backed money system, replaced the gold standard in the U.S. and many other countries. While fiat money itself has no fixed worth, its value is backed by a government's promise that it is legal tender and therefore has value based on that country's economy and government.

Considerations

Inflation rates and anticipated economic stability are factors determining the value of a country's currency in the world market. Taxation, deficits, purchasing power, currency reserves, employment statistics and interest rates all contribute to a particular currency's buying power and therefore its worth.

References

• "Principles of Economics"; George Mankiw; 2008
• Cato Institute: Is the Gold Standard Still the Gold Standard among Monetary Systems?
• Alan Greenspan (2002); Federal Reserve Board: The History of Money

Resources

• Cowen, Tyler (September 18, 2010); New York Times: Can the Fed Offer a Reason to Cheer?