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A monetary unit is the basic primary denomination of a currency. While not usually the lowest value monetary unit, it is generally considered the first whole denomination, of which lower value units are considered fractional denominations. In the United States, the basic monetary unit is the dollar; other countries and regions with different currencies have a distinct monetary unit, such as the peso, the euro, and the yen.
Creating a basic monetary unit adds stability of definitions to an economic system. It can serve as a reference point for value and prices, giving the market a vocabulary of value. For instance, if a sandwich costs $5 US Dollars (USD), the value of the sandwich is interpreted through the understanding of the monetary unit. Whether that price is considered expensive or inexpensive has to do with the perceived value of the sandwich, and the current level of inflation.
While adding some sense of stability, a monetary unit is not actually a stable concept. According to some inflation calculators, the buying power of $100 USD in 1900 would equal the buying power of a little over $2500 USD in 2009. While the literal unit of money did not change, its purchasing power shifted greatly over a century due to a wide variety of factors, including inflation. Therefore, while a monetary unit provides a concrete definition of a denomination, its value may be relative.
It's generally impractical to issue currency only equal to the basic unit, thus currency systems usually create many different denominations of currency that are either multiples or fractions of the original primary unit. In the British pound sterling, fractional denominations include one, five, 10, 25, and 50 pence pieces, which are all fractional divisions of the pound. Multiples of the basic unit, such as $20 USD bills, make it far more convenient to carry and use larger sums in cash.
A monetary unit helps to define and unite a nation or region. Using the same form of currency promotes ease of trade, by avoiding complex issues of foreign exchange rates and currency validation. Some economic analysts argue that the adoption of a universal monetary unit is all but certain in the future, as global trade becomes both more convenient and more common. Nevertheless, some nations, such as the United Kingdom, see their currency as a unique part of national character, and have rebuffed opportunities to join the widespread European currency system, at least partly due to nationalistic concerns.
@everetra - I, too, don’t believe that the end is near for currency markets. If anything, it just becomes one more buying opportunity for people who know how to be smart in tough times.
I used to live overseas and I’d watch the currency exchange rates fluctuate on a daily basis. I could buy more of the local currency on one day than I did on the next. That’s as far as I got to treating it like a commodity however.
Later I discovered that there were people who were doing just that, trading the currencies like they were shares of stock. I don’t recommend that you get into that business, but if you know what you’re doing, you can make some money, trading money.
@hamje32 - I don’t think that will ever happen. The dollar is still the strongest currency in the world because it’s still backed by the strongest nation and economy in the world.
The article’s assertion that some people envision a world currency, while factually accurate, will never materialize in my opinion.
How do I know this? It's because that it’s already been attempted on a smaller scale, with mixed results. Europe created the Euro as a reserve currency for Europe, and its high hopes have been dashed as Europe has experienced its own monetary crisis.
I hardly think that a reserve currency is the answer. Honestly, I don’t know what the answer is, besides ensuring that each country does its best to ensure that its own economies remain stable.
The article is correct when it states that inflation affects the valuation of a monetary unit, like the U.S. dollar.
However, the example cited merely reflects the effects of inflation over a long period of time. What’s worse is when you have hyper inflation over a short period, made possible not because of the rise in living expenses but because of bad government policy.
For example, the Federal Reserve can flood the market with dollars – basically printing money out of thin air, in response to a difficult economic climate – and the dollar loses its valuation very quickly over a short period of time.
It ceases to be a stable monetary unit and then you hear whispers from the rest of the world for a new reserve currency.
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