The world’s economy has been using paper money for over 3000 years. Today’s currency isn’t made of precious metals, but it’s still used as a medium of exchange and store of value. Its worth is based on the confidence it inspires in people and businesses to exchange it for goods and services. Money also serves as a unit of account that helps measure the changes in the price of things over time.
Currencies are bought and sold, just like other goods, in foreign exchange markets, which operate 24 hours a day, five days a week. They rise in value when more people want them (demand is high) and decrease in value if there’s too much of them (supply is high).
Inflation can dramatically alter the relative value of a currency. When it’s high, a $10 bill buys less and less than it did when your parents were kids. Moderate inflation is normal, but unchecked hyperinflation can be disastrous for an economy.
In the past, governments often pegged their currencies to precious metals or other assets that were widely accepted as valuable. This helped to stabilize the value of a country’s currency and gave confidence to investors. Today, most major currencies are “free-floating,” meaning their prices are determined in the marketplace based on market factors and a country’s economic outlook.
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