The Italian word "currency" in the Russian language came in the middle of the XVIII century. At first it meant "payment by bill of exchange", but already in the middle of the 19th century it acquired a new meaning - "the monetary system of the state, backed by gold." In this article we will tell you what currency is.
General information
Banknotes, coins, treasury bills, which are legal tender and underlie the state’s monetary system, are called currencies. In household vocabulary, this term is most often used as banknotes of a foreign state. To distinguish between these two concepts, the following notation is used:
- closed currency operates within one state;
- convertible can be exchanged for monetary units of another country.
Types of currencies
Each country has national and foreign currency units. Russian currency - rubles that are in circulation, withdrawn from circulation, funds on accounts in banks of the Russian Federation and abroad, which are recognized as a means of payment. The national currency is used for domestic payments, and foreign - for international. The second is money that is in free circulation or withdrawn from it, but is a means of payment in a foreign country or group of countries. To conduct international transactions, a currency exchange is necessary based on the established rate. This is the price of one currency, expressed in monetary units of another state. The rate is set based on supply and demand in the foreign exchange market. The goods on it are monetary units: rubles, dollars, yen and so on. National and foreign exchange rates change in different directions. The fall in the value of the domestic monetary unit leads to a reduction in the cost of exports and a rise in the cost of imports.
Sustainability of courses
According to the degree of stability, the courses are divided into strong and weak. The hard currency is backed by gold reserves and is resistant to the value of other monetary units. The strong are characterized by an excess of the market price over par. A weak currency is less stable against the exchange rates of monetary units of other countries. Its market rate is below par. The same currency unit in practice is strong and weak in relation to the currencies of different countries.
The official exchange rates of foreign currencies to the ruble are set by the Central Bank every working day. They enter into force on the next business day after signing and are valid until the next order. These data are published on the website of the Bank of Russia. However, there are no obligations from banks to buy or sell currency at this rate. For legal entities and individuals, this information is provided for information. To find out the exact exchange rate, you will have to use a currency converter. It can be found on the website of any bank.
Currency Characteristics
The conditions and volumes of sales largely depend on the restrictions that are set by the state and are characterized by the convertibility parameter. This is a certain financial regime that allows the exchange of a national currency to a foreign one during foreign economic operations. According to this indicator, the currency in banks is divided into three groups.
Convertibility Types
Freely convertible currency (ICS) is freely exchanged for monetary units of other countries, as well as for payment instruments that are used for settlements in international transactions. In world practice, the main characteristic of turnover is:
- lack of any exchange restrictions;
- the availability of a flexible course.
ICS are used for transfers in the international payment system (CLS). This allows individuals and entrepreneurs to conduct transactions without exchanging the national currency for any convertible.
Having dealt with the issue of ICS, we turn to the question of what is a partially convertible and closed currency (non-convertible).
The first is a currency with certain restrictions on turnover in a particular region, for some individuals or for several types of operations. Non-convertible is a monetary unit that, for economic or political reasons, the state has banned from exchanging for banknotes of another country.
Within a partially convertible currency, external and internal turnover is distinguished. The first implies the ability of foreign states to freely transfer national currency abroad. Internal implies the right of citizens and enterprises to buy foreign currency for transactions. To introduce convertibility, the state must pass an appropriate law.
Benefits of ICS
Having dealt with the question of what is a currency that is freely convertible, we turn to the question of what advantages this gives the state. Today, free turnover is determined by the economic power of the country. ICS allows the state to create favorable conditions for improving the balance of payments, testifies to economic freedom, promotes the development of international competition, as a result of which enterprises are forced to increase production efficiency.
In such circumstances, organizations may receive loans in foreign currency notes. Foreign economic activity is stimulated: by reducing foreign exchange risk, the export and import of goods increases. But at the same time, higher prices for imports lead to a devaluation of the national currency. The introduction of ICS involves the state in the system of the international division of labor, increases the inflow of foreign capital, and also simplifies the procedure for conducting transactions.
The conditions for the formation of turnover
These include:
- satisfaction of demand with supply in the market;
- the availability of the required amount of liquid assets;
- creation of a reserve fund;
- balanced balance of payments;
- the state budget deficit, if any, should not exceed 5% of GDP;
- conducting a reasonable pricing policy without distortions, but subject to the laws of value;
- pursuing a sound credit policy with a rational interest rate and targeted financing;
- the introduction of effective antitrust laws to demonopolize the economy.
World currencies
Due to liquidity and the impact on the financial market, seven monetary units are usually attributed to world currencies:
- Euro;
- U.S. dollar;
- Canadian, Austrian and Swiss dollars;
- Japanese yen
- Swiss frank.
In these currencies, a greater number of contracts are concluded; they are most often traded on the Forex market.
The main signs of world currency:
- high liquidity;
- solvency;
- course stability.
They are used to create foreign exchange reserves. World currencies are interconnected. When the price of one of them falls, the value of the other increases. And vice versa.
Most European countries have their own currencies and central banks that regulate monetary policy. In 1996, the monetary union was formed, which by 2014 already unites 18 countries. In the Eurozone, control is exercised by the European Central Bank. The currency valid in this territory is the euro. Since 1999, the euro has been used for cashless payments. Since 2002 - for cash payments. Today, the euro competes with the dollar in terms of turnover and shares in the creation of foreign exchange reserves.
Another very popular world currency is the US dollar. It is a means of payment in more than twenty countries of the world. The past half century, the dollar - one of the sources for creating a reserve currency. Immediately after World War II, he replaced the British pound.
The yen is used for transactions in Asian countries. Settlements in the national currency of Japan are more than in the dollar or the euro.
Approximately 5% of foreign exchange reserves are in pounds sterling. The national currency of Great Britain is one of the most stable in the world.
The Australian dollar is very popular on the Sydney Stock Exchange.
The Canadian dollar is most often used for settlements on commodity exchanges in the trading of sand, metals and energy.
Currency of Russia - ICS
In order for the ruble to become fully reversible, it must be supported by a material equivalent. In theory, the Russian economy, assessed by independent experts at a high level, could become such an equivalent. But in practice, a more realistic option is to ensure the ruble by the state. The launch of a convertible currency that is not backed by government obligations, as was the case with the dollar, will fail. Euro as a world currency is still holding conditionally state status.
Ensuring the status of ICS by the state implies that Russia will have to pay material resources on demand. That is, the ruble mass in the world should not exceed the material security of the country. Given corruption at all levels of government, it is rather difficult to guarantee.
However, the Russian government is taking all steps to give the ruble the status of ICS. Recently, the Bank of Russia announced its intention to completely switch to the ruble. Other credit institutions, including Sberbank, also thought about this. The currency of the Russian Federation in the near future may be included in the list of Continuous Linked Settlement Bank. It uses for ICS calculations. The Bank of Russia has already filed a corresponding application with CLS, but there is no answer yet.
Summary
Banknotes issued by one country, but used as a means of payment in other countries, indicate a high level of development of the state. Ideally, banknotes and coins should be supported by the legal status of the country or its national wealth, freely exchange for banknotes of other countries. This is what currency is freely convertible around the world.