Currency, in economics, term designating all the circulating media of exchange of a country. In this sense, a currency includes coins and paper money. The term sometimes includes credit instruments. Coins are generally designated as metallic currency, and paper money and credit instruments, as paper currency. Further distinctions are made in the latter classification: government notes are called government currency; banknotes are designated as bank currency, and cheques drawn on bank deposits are called deposit currency.

This use of the term currency is of comparatively recent origin, dating from the period following World War I. Earlier uses of the term were more restricted. In countries in which the governments did not issue paper money, the term paper currency was applied exclusively to bank notes. In a number of other countries, on the contrary, the application of the term currency was limited to government-issued, legal-tender paper money. The change from the earlier, restricted meanings of the term to its modern significance resulted in part from the great increase, following World War I, in the use of credit instruments.

The volume of currency needed to transact the business of a country is determined, basically, by the volume of commodities and services in circulation. Ordinarily, the larger the volume of commodities and services, the greater the volume of currency needed to circulate them. During periods of increasing production, the volume of currency tends to rise; during recessions, it may fall.

Particular currencies are used to facilitate international trade. For example, all oil trades are conducted in US dollars, and increasingly trade within the European Union (EU) is conducted in the Euro, which became the sole legal currency for all states participating in full European Economic and the Monetary Union in January 2002. The Euro may eventually become the single common currency for all EU member states.

RELATED ARTICLES:  Microeconomics