I hope this doesn't come across as presumptuous, but I post answers on Quora quite often. The subject in this case was the question I answered and below was the answer I gave. I don't get a lot of feedback on Quora so I'd like to post a few of these here and see how it goes.....
Unfortunately you could write a book on this question, no, wait, several books many of whom might give different answers.
Currency is generally used to describe the money of some ruling entity. In the modern world this usually describes a sovereign nation, or in the case of the Euro, a treaty between several sovereign nations agreeing to work under a single currency regime (*cough* Europe).
Anyone can create a currency, the trick is getting people to accept it. -Hyman Minsky
You must understand that “money” (currency) is by nature an IOU. You can create a dollar-denominated “money” by writing “IOU five dollars” on a slip of paper. Your problem is to get someone to accept it. Sovereign government has an easy time finding acceptors—in part because millions of us owe payments to government.
So at it’s root, the value of currency comes from the fact that there is a regime that has the power to demand (and enforce) that we all pay something in the dollars the regime creates.
Futhermore, government has declared that, from a legal standpoint, it’s dollars are “legal tender”. This means if you try to pay someone in cows, even though the cows might be worth what you owe, the payee can demand dollars and the courts will enforce the governments dollar regime over your cow payment.
When I say “government dollars”, I consider the Fed a part of the government, even though it’s semi-autonomous. I mention this because, invariably someone will point out that the dollar is created by the Federal Reserve, hence the term “Federal Reserve Note” on today’s money, rather than “US Note”. However, this can be quickly dispelled as the Fed has no enforcement regime of it’s own, that regime belongs to the US Government giving the government the ultimate power to create money, even if it’s delegated that task to the Federal Reserve via a Charter.
Moving on…..Think about it like this;
Sometime in the 1800’s while the Brits were colonizing Africa, they needed to employ the locals to do labor. They offered the locals tribes people British Crowns in payment for labor. The tribes people had no use for Crowns and refused. The Brits then told the locals they had to pay a tax of several crowns per week or they would burn down their homes. Faced with this new reality Crowns now had value because people valued their homes. To get Crowns, the locals would have to work.
Now, I generalized this story, keeping the important details. The important point is that once every tribes person had Crowns, they could very well trade their labor to each other and collect extra Crowns to which they could pay the Brits. This might give Crows value for more than just paying the Brits but paying each other. As long as the Brits were there to enforce the currency regeim, Crows would have value. And indeed that exactly what we see in the US today. No matter how much you dislike having to use the US dollar. No matter how “worthless” a person claims it is, anyone that wants to participate in the modern economy (own land, purchase from a business, take a loan ect) must acquire US dollars.