What is a currency
Essentially, a currency is a social contract.
A currency requires people to believe that the bill in their wallets, the digits in their bank account and their gift card balance can be exchanged for what they want or need, and sellers also agree to deem that social contract valid and valuable.
Looking throughout history, we learn that societies tried a variety of methods to execute this contract by using seashells, salt, gold and the complex central bank system we are using today. Some currencies are healthier and more robust than others, meaning, as time moves on, the healthier ones maintain more value.
The importance of currencies is self-explanatory. People hope to have the healthiest possible currency because most of us exchange our labor and time for currencies, which in return represents our efforts towards life. Currency is the medium, through which human labor is transformed into merchandise and service. In that sense, the ability to obtain a healthy currency should be considered as one of the most powerful individual capabilities.
Currencies are important to governments too because the modern economy is composed of countries and governments that have the power to control currencies, which can be a very seductive while easily abused power.
How does today’s currency work
The legal tenders (money) that are circulating in all countries are collectively called fiat money (The term fiat derives from the Latin fiat ("let it be done") used in the sense of an order, decree or resolution)
The value of these currencies is determined by the countries that issue and accept them. Since governments can produce more fiat currencies with low costs, it is universally agreed that governments have the power to print infinite money at any time.
Alan Greenspan, an American economist who served as Chair of the Federal Reserve of the United States from 1987 to 2006, once said that the United States can "repay any debt because it can always achieve this goal by printing money." This can be problematic even in the world's most stable economy. The most ancient national currency is the British pound sterling, which has lost 99.5% of its purchasing power in the past 300 years. In the last century, the US dollar has lost 90% of its purchasing power and, as a result, steak cost $0.36 in 1925, $3 in the 1990s but $12 today. These are by far the most stable legal tender we human beings know. However, statistically, the life span of an ordinary legal tender is only 27 years.
The goal of all modern central banks is to achieve slow while stable inflation. However, most currencies suffer from high and long-term inflation, which can exert a damaging effect on money-saving, especially to those who are unable to afford hard assets. (in finance, a "hard asset" may be real estate, commodities, or energy.) High inflation can make it extremely hard for people to save for their future.
Fiat money has been a propeller of long-term warfare. Governments can simply print more money to sustain wars and distribute the unseen cost to the upcoming generations through pumping inflation, which means longer and more resource-consuming wars. The first world war was the perfect example because the imitators provided funds for the later stage of the war through inflation. Both Russia and Germany suspended the gold standard, under which legal tender could be converted into a fixed amount of gold. Instead, they suspended the exchange mechanism and proceed to print money without any gold support to continue the brutal fight. As a result, the war eventually lasted longer than anyone could have predicted. After Germany's defeat, the only way the country could pay the huge reparations was to print more money. By 1923, the Deutschmark depreciated to 1/1000000000000 of its pre-war value, laying the foundation for World War II.
As the treaty was being signed Ferdinand Foch said: "This is not peace. It is an armistice for 20 years"