Entering the module
One sentence: a currency is a promise with a name and a border — and "backing" is the answer to the question "what protects this promise?".
After the module you will be able to:
- explain what a "backed" currency means and why gold is not the only answer;
- tell apart a floating rate, a fixed rate and a currency board;
- tell how Bulgaria went from hyperinflation in 1997 to the euro in 2026.
Chapters:
- What a currency is
- The anchors: gold, silver and both together
- The price of the gold anchor
- Floating or pegged
- Whose money the world holds
- The currency board: an anchor without gold
- The laboratory: Bulgaria 1996–97
- From the lev to the euro: 1997 → 2026 → The iron principle of the module
For the youngest · ages 6–7
🐣 The youngest: In many European countries money is called the euro. In other countries money has other names. The name of a country's money is called its currency. Every country looks after its money so that it does not lose its strength. That is why people trust it and accept it.
Play together (5 minutes): Look together at the coins from 1 cent to €2. Look for the different pictures on their backs. Then invent money for your own imaginary country: a name, a colour and a picture.
A question for the evening: "What will the money in your invented country be called, and what will be on it?"
A game from the catalogue: RZ-03 "The dwarf's scales" — https://pecuvo.eu/igri/katalog/#rz-03 (in Bulgarian)
Chapter 1 · What a currency is
👧 Child In every country money has a name: euro, dollar, yen. That name is the currency. When you travel, you change your money into the foreign money — and then you see that every currency has a "price" in the others.
🧑 Teenager A currency is the money that a country (or a union of countries, like the euro area) has declared legal tender: everyone must accept it and taxes are paid in it. There are about 155 currencies in circulation in the world ✔ (according to the ISO 4217 list). Some countries have none of their own — they use a foreign or a shared one.
🧔 Adult A currency combines three things:
- a unit of account — what we count prices and debts in;
- a means of payment — what we settle bills with;
- a border — whose central bank and whose laws stand behind it.
Its value against other currencies (the exchange rate) reflects trust in that border: in the institutions, in the economy, in discipline.
Myth → truth
- Myth: "A strong currency = a strong country."
- Truth: a currency that has risen a lot makes exports harder. "Strong" is the one people trust, not necessarily the one that is "worth a lot".
Who profits? The issuer of the currency earns seigniorage (the difference between the cost of printing and the face value). Bureaux de change and banks earn on the "buy / sell" spread.
Scene for 3D: a world map with glowing borders. The child crosses a border and the wallet changes colour. Above every country you can see who "keeps the promise" — its central bank.
→ Continue at the source
- ECB — "What is money?": https://www.ecb.europa.eu/ecb-and-you/explainers/tell-me-more/html/what_is_money.en.html
Sources
- ✔ ISO 4217 — the list of currency codes (the number changes): https://www.six-group.com/en/products-services/financial-information/data-standards.html — counted on 21.10.2026 from "List One" (edition of 17.09.2026): 178 codes, of which 10 funds and 13 non-operational codes (precious metals, SDR, units of account, test) → about 155 currencies in circulation. Corrected: it used to say "about 180".
- ✔ ECB, "What is money?" (the address above, corrected on 19.10.2026).
Chapter 2 · The anchors: gold, silver and both together
👧 Child Once coins were made of gold or silver, so they were "worth something in themselves". Later banknotes promised: "This piece of paper can be exchanged for this much gold." Gold was the anchor of money.
🧑 Teenager Countries choose an anchor:
- gold — the gold standard;
- silver;
- both — bimetallism.
With two metals there is a catch: if the state sets wrongly how much silver one gold coin is worth, people keep the "more valuable" metal and spend the other one. This is Gresham's law: bad money drives out good. In 1717 Isaac Newton, then head of the English Mint, set the price of the gold coin. Historians debate whether Britain thereby "accidentally" moved to the gold standard or carried on with both metals. It adopted the gold standard by law in 1821.
🧔 Adult The Latin Monetary Union (1865) — France, Belgium, Italy, Switzerland — was an attempt at a common bimetallic system with a ratio of 15.5 : 1 (silver to gold). The big gold finds in California and Australia in the mid-19th century changed the market prices of the two metals. The fixed ratio no longer matched the market, and the bimetallic systems in practice became gold-based. The lesson: an anchor whose price you cannot control leads you, instead of you leading it.
Myth → truth
- Myth: "Gold has always been the only anchor."
- Truth: for a long time the anchor was silver or both metals. Gold won at the end of the 19th century.
Who profits? Mine owners and those who hold the "more valuable" metal when the ratio flips.
Scene for 3D: two anchors on one chain — a gold one and a silver one. The child moves a "gold rush" to California and watches the silver anchor break away.
→ Continue at the source
- Bank of England — history: https://www.bankofengland.co.uk/about/history
Sources
- ✔ Yeager, "The Independent Review", 1996 (Newton, Gresham, bimetallism) — https://www.independent.org/wp-content/uploads/tir/1996/04/tir_01_1_06_yeager.pdf
- ✔ The Latin Monetary Union, 1865, 15.5 : 1 — https://en.wikipedia.org/wiki/Latin_Monetary_Union (to be replaced with an academic source)
Chapter 3 · The price of the gold anchor
👧 Child If money is tied to gold and there is not enough gold, there is not enough money either. Then prices fall, people buy less and some lose their jobs. The anchor keeps the boat from drifting away, but sometimes it holds it in place when it needs to move.
🧑 Teenager Under the gold standard the central bank cannot "print" more money in a crisis. So crises become more severe. When prices fall (deflation), debts become heavier and companies more cautious. Bank panics are frequent. During the Great Depression (the 1930s) the countries that left gold earlier recovered faster ✔ (Eichengreen & Sachs, 1985).
🧔 Adult The gold standard gives discipline (the government cannot finance deficits by printing) at the price of flexibility (it cannot respond to shocks). This is the same dilemma every fixed regime faces, including the currency board (Chapter 6). The question is not "gold or not" but how many rules versus how much judgement a society wants.
Myth → truth
- Myth: "There are no crises under the gold standard."
- Truth: there are — and often more severe ones, because nobody can step in.
Who profits? Creditors and holders of money (debts do not lose value). Debtors and working people lose in a deflation.
Scene for 3D: the scales from Chapter 2. If the "economy" grows but the gold does not, the scales tip and the prices on the shelves fall while the factory closes.
→ Continue at the source
- Federal Reserve History — the essay "The Great Depression" (Gary Richardson): https://www.federalreservehistory.org/essays/great-depression
Sources
- ✔ Eichengreen & Sachs, "Exchange Rates and Economic Recovery in the 1930s", Journal of Economic History, vol. 45, no. 4, 1985, pp. 925–946 — https://www.nber.org/papers/w1498
- ✔ Federal Reserve History, Richardson, "The Great Depression" — how the international gold standard transmitted the Fed's decisions to other countries: https://www.federalreservehistory.org/essays/great-depression (opened 21.10.2026)
Chapter 4 · Floating or pegged
👧 Child Some currencies are "tied" to another one — like a little boat tied to a big ship. Others "float" on their own and rock on the waves.
🧑 Teenager
- Floating rate: the price of the currency is set on the market every day (the dollar, the yen, the euro against the others).
- Fixed rate: the state promises a set rate against another currency and defends it.
- In between: bands, crawling pegs and so on.
After 1971–1973 the major currencies float (Module 1, Chapter 7). Every year the IMF describes the regime of every country.
🧔 Adult Here the so-called "impossible trinity" applies: a country cannot have at the same time a fixed exchange rate, free movement of capital and its own monetary policy. It can choose two of the three. The euro area chose a common currency and free capital — monetary policy is shared, run by the ECB. A currency board (Chapter 6) chooses a fixed rate and free capital and gives up its own policy.
Myth → truth
- Myth: "A fixed rate is always safer."
- Truth: it is safe as long as there are reserves and trust. When they are lost, it falls suddenly (Argentina, 2002).
Who profits? With a floating rate — those who trade the risk. With a fixed one — importers and people in debt in a foreign currency, as long as the anchor holds.
Scene for 3D: a harbour with boats. The child chooses: tie the boat to the ship (fixed) or let it go (floating). The storm shows the price of each choice.
→ Continue at the source
- IMF — the annual report on exchange rate arrangements (AREAER): https://www.imf.org/en/Publications/Annual-Arrangements-Exchange-Rates
Sources
- ✔ IMF, AREAER (2022 edition, published 26.07.2023) — https://www.imf.org/en/Publications/Annual-Report-on-Exchange-Arrangements-and-Exchange-Restrictions/Issues/2023/07/26/Annual-Report-on-Exchange-Arrangements-and-Exchange-Restrictions-2022-530144
- ✔ Mundell–Fleming, the "impossible trinity" (textbook framework; Fleming 1962, Mundell 1963, IMF Staff Papers).
Chapter 5 · Whose money the world holds
👧 Child Countries save too — in foreign money. Most of all they save in dollars, then in euros. This money is called reserves.
🧑 Teenager Central banks hold foreign exchange reserves to pay for imports, to defend the exchange rate and to have a "cushion" in a crisis. According to the IMF, in the second quarter of 2026:
- total reserves were $13.22 trillion;
- the dollar held 56.70 %;
- the euro — 20.60 %;
- the yen — 4.96 %.
🧔 Adult A reserve currency gives its issuer an "exorbitant privilege": the world wants its assets, so it can borrow more cheaply. The dollar's share has been slowly falling from about 71 % in 1999 (IMF, COFER), but it remains dominant. Small changes in the share often come from exchange rate movements, not from central banks deciding to buy or sell — so the number has to be read carefully.
Myth → truth
- Myth: "Tomorrow the dollar will stop being the world's currency."
- Truth: its share is falling slowly, over decades. The reserve role depends on the depth of markets and trust in institutions.
Who profits? The issuer of the reserve currency — cheaper debt. Countries with large reserves have protection, but also a cost: their money sits in foreign assets with a low return.
Scene for 3D: a globe with vaults. The child sees how the "light" of each currency flows into the vaults and what part of the whole pile each one is.
→ Continue at the source
- IMF — the COFER data: https://data.imf.org/COFER
Sources
- ✔ IMF, IMF Data Brief, 30.09.2026 (COFER for Q2 2026: 56.70 % / 20.60 % / 4.96 %; $13.22 trillion) — https://data.imf.org/en/news/imf%20data%20brief%20september%2030
- ✔ The dollar's share in 1999 — 71 % (IMF, blog "US Dollar Share of Global Foreign Exchange Reserves Drops to 25-Year Low", 5.05.2021, based on COFER data): https://www.imf.org/en/Blogs/Articles/2021/05/05/blog-us-dollar-share-of-global-foreign-exchange-reserves-drops-to-25-year-low (opened 21.10.2026). The figure for 2000 was removed — not checked against the primary series.
Chapter 6 · The currency board: an anchor without gold
👧 Child Imagine that every banknote in a country has a "twin" in the vault — one safe foreign banknote. However much money there is in people's pockets, there is that much safe money in the vault. This is a currency board.
🧑 Teenager A currency board promises that the local money can be exchanged for the anchor currency at a fixed rate, and it holds reserves for all of it. It cannot print money at will and it cannot finance the state. Examples:
- Hong Kong — since 1983;
- Estonia — from 1992;
- Lithuania — from 1994;
- Bosnia and Herzegovina — under the Dayton Agreement (1995);
- Bulgaria — from 1997.
🧔 Adult The price of a currency board:
- there is no independent monetary policy;
- the central bank cannot be a lender of last resort for the banks (it has only a limited reserve for that purpose);
- adjustment happens through the quantity of money: if capital flows out, money shrinks, interest rates rise, prices contract.
So a board works when the state keeps the budget in order, the banks are sound and society accepts the discipline. When that is missing, as in Argentina in 1991–2002, the board collapses with severe consequences.
Myth → truth
- Myth: "Nothing can go wrong under a currency board."
- Truth: it can — the board shifts the risk onto the budget, the banks and wages. It is discipline, not magic.
Who profits? Savers and importers — from stability. What is lost is flexibility in shocks: the burden falls on jobs and incomes.
Scene for 3D: a vault with mirrored shelves. Every lev in the street has a reflection — a Deutschmark, later a euro — in the vault. If someone takes out a reflection, a banknote in the street disappears.
→ Continue at the source
- BIS — a working paper on currency boards: https://www.bis.org/publ/work110.pdf
- CEPII — an analysis of currency boards: https://www.cepii.fr/PDF_PUB/lettre/2008/let280ang.pdf
Sources
- ✔ BIS Working Paper 110 — https://www.bis.org/publ/work110.pdf
- ✔ CEPII, La Lettre 280, 2008 — https://www.cepii.fr/PDF_PUB/lettre/2008/let280ang.pdf
- ✔ Danmarks Nationalbank, Monetary Review 2000 (Hong Kong after 1988) — https://www.nationalbanken.dk/media/2wzp2zif/2000-mon2-curr-85.pdf
Chapter 7 · The laboratory: Bulgaria 1996–97
👧 Child About 30 years ago in Bulgaria prices rose so fast that people ran to the shop right after getting paid — tomorrow the same money would buy less. Some banks closed their doors and people could not take out their savings. It was a frightening time. Then the country did something brave: it tied its money to a safe foreign currency.
🧑 Teenager In 1996 the banking system was in crisis: many banks had made loans that were not being repaid (over 60 % at some of them). The central bank poured in money to rescue them and financed the state budget. Trust in the lev fell. At the beginning of 1997:
- monthly inflation reached 243 % in February (according to the IMF);
- the exchange rate reached about 3,000 leva per dollar.
After the political crisis, the caretaker government adopted a programme with a currency board. Already in March, on expectations alone, the lev went back to about 1,500 per dollar and inflation fell to 12.3 % for the month (Bulgarian National Bank (BNB) / National Statistical Institute (NSI); the IMF gives 12.7 %).
🧔 Adult There were three causes (Gulde, IMF):
- money to rescue the banks;
- financing of the budget by the central bank;
- collapsing trust in the lev.
The currency board from 1 July 1997 stopped all three: the central bank could no longer lend either to the banks (except within a limited reserve) or to the state. The rate was 1,000 leva to 1 Deutschmark. Stabilisation was fast — for the IMF the board was "a decisive factor". The price was social: many families' savings had already been eaten by inflation, and trust in banks recovered slowly. This memory explains a lot of the attitudes to money in Bulgaria even today.
Myth → truth
- Myth: "Hyperinflation came out of nowhere."
- Truth: it had clear causes — decisions to pour money into bad banks and the budget, and lost trust.
Who profits? Debtors, whose debts melt away, and those who hold dollars or Deutschmarks. Savers in leva, pensioners and people on wages lose.
Scene for 3D: a Bulgarian street in 1997. The price of bread in the shop window changes every hour. The child has a bag of leva and watches it buy less and less. Then the child pulls a "currency board" lever — the price freezes, but the factory across the street has to cope on its own.
→ Continue at the source
- IMF, Anne-Marie Gulde — "The Role of the Currency Board in Bulgaria's Stabilization" (1999): https://www.imf.org/external/pubs/ft/fandd/1999/09/gulde.htm
- IMF, Public Information Notice 97/15: https://www.imf.org/en/News/Articles/2015/09/28/04/53/pn9715
Sources
- ✔ Gulde, Finance & Development, September 1999 (the causes; "a decisive factor"; annual inflation ~500 % in January and over 2,000 % in March 1997) — https://www.imf.org/external/pubs/ft/fandd/1999/09/pdf/gulde.pdf
- ✔ IMF, PIN 97/15 (monthly inflation 243 % in February; ~3,000 → ~1,500 leva per dollar; 12.7 % in March — the BNB gives 12.3 %) — https://www.imf.org/en/News/Articles/2015/09/28/04/53/pn9715
- ✔ Bad loans over 60 % at many banks — https://hal-sciencespo.archives-ouvertes.fr/hal-03585877/file/article-receo-0338-0599-1999-num-30-2-2979.pdf
- ✔ BNB, Annual Report 1997 (NSI data): January +43.5 %, February +242.7 % on the previous month, March +12.3 %, April −0.7 %; for the whole of 1997 (Dec./Dec.) — 578.6 % — https://www.bnb.bg/bnbweb/groups/public/documents/bnb_publication/p_anualreports_1997_en.pdf · The monthly (243 %) and annual (~500 %, >2,000 %) figures are different measures, not a contradiction.
Chapter 8 · From the lev to the euro: 1997 → 2026
👧 Child After 1997 the lev was "tied" to the Deutschmark, and later to the euro. Now, since 1 January 2026, Bulgaria pays directly in euros — like Germany, France and 19 other countries.
🧑 Teenager The path step by step:
- 1.07.1997 — currency board, 1,000 leva = 1 Deutschmark.
- 5.07.1999 — redenomination: 1,000 old leva = 1 new lev; the new lev = 1 Deutschmark. Until the end of 1999 the old and new money circulated side by side.
- 1999/2002 — the Deutschmark was replaced by the euro, and the lev's rate became 1.95583 leva = €1.
- 10.07.2020 — the lev entered the euro's waiting room (ERM II).
- 1.01.2026 — Bulgaria adopted the euro and became the 21st country in the euro area. The rate is irrevocably fixed at 1.95583.
🧔 Adult The changeover does not change the purchasing power of money on the day of the switch: wages, prices and accounts are converted at one and the same rate. The protection rules:
- prices in both currencies were compulsory from 8.08.2025 to 8.08.2026;
- in January 2026 the two currencies circulated side by side, and change was given only in euros.
With the euro, Bulgaria swapped the currency board for a seat at the table: the BNB takes part in the ECB's decisions, and the banks gain access to the common lender of last resort. The price is that interest rates are decided for the whole euro area, not only for Bulgaria — which, frankly, was also true under the currency board.
Check in your country — What exchange rate regime does your currency have: floating, pegged, a currency board, or a shared currency such as the euro? The IMF's annual AREAER report (Chapter 4) describes every country's regime; your central bank's website explains it in plain language.
Myth → truth
- Myth: "With the euro our money lost half its value."
- Truth: the rate has been the same since 1999 (1.95583). Whatever price changes there are, they do not come from the change of currency itself — which is why they are tracked and compared with official statistics, not with how things feel.
Who profits? Businesses and people who trade with the euro area — no exchange rate risk and no conversion fees. Bureaux de change lose. The risk lies in rounding prices up, which is why dual pricing was required.
Scene for 3D: a time tunnel — 1997 → 1999 → 2020 → 2026. At every stop the banknote in the child's hand changes, and the vault behind it turns into a table with 21 chairs.
→ Continue at the source
- ECB — Bulgaria and the euro: https://ecb.europa.eu/euro/changeover/bulgaria/html/index.en.html
- European Commission — "Bulgaria adopts euro": https://trade.ec.europa.eu/access-to-markets/en/news/bulgaria-adopts-euro-1-january-2026
- Bulgarian News Agency (BTA) — the archive on the redenomination (1999): https://bta.bg/en/news/836799-february-19-1999-parliament-passes-act-on-re-denomination-of-lev
Sources
- ✔ BTA, 19.02.1999 (the act; in force from 5.07.1999; 1 new lev = 1 DEM) — https://bta.bg/en/news/836799-february-19-1999-parliament-passes-act-on-re-denomination-of-lev
- ✔ ECB, press release 8.07.2025 (1.95583; from 1.01.2026) — https://www.ecb.europa.eu/press/pr/date/2025/html/ecb.pr250708~b9676a9fa8.en.html
- ✔ European Commission, Access2Markets (dual prices 8.08.2025–8.08.2026; parallel circulation in January 2026) — https://trade.ec.europa.eu/access-to-markets/en/news/bulgaria-adopts-euro-1-january-2026
- ✔ ERM II from 10.07.2020 — the content map, ✔ (BTA / ECB).
The iron principle of the module
Know which currency you live in, which one you earn in and which one you owe in. When the three do not match, you carry exchange rate risk — even if you cannot see it.
- 👧 Child: "Does this money work in the other country?"
- 🧑 Teenager: before you buy something online in a foreign currency — how much is it really in euros, with the conversion fee?
- 🧔 Adult: is your salary in one currency and your loan in another? This is the oldest trap of crises — in Argentina, in Iceland, and with the Swiss franc loans in Hungary, Poland and Croatia ✔ (Bruegel: https://www.bruegel.org/blog-post/foreign-loan-hangovers-and-macro-prudential-measures-central-eastern-europe).
Your step in Pecuvo: every space in the portfolio has its own currency (new ones in euros; historical data from earlier years in leva). Check: which currency are your accounts in, and which one are your debts in?
Check yourself (3 questions per level)
- 👧 1. What is a currency? 2. What does a currency board keep in the vault? 3. From what date does Bulgaria pay in euros?
- 🧑 1. What is Gresham's law? 2. Which three things can a country not have at the same time? 3. What did the currency board stop in 1997?
- 🧔 1. What is the price of a currency board? 2. Why must a change in the dollar's share of reserves be read carefully? 3. What does Bulgaria gain and what does it lose with the euro compared with the currency board?