The History of Foreign Exchange

The History of Foreign Exchange

While one may think that currencies are just a thing of modern times, when borders were defined more strictly and each country needed a medium to do business with their neighbors, the history of foreign currencies actually goes back to much earlier times. The Romans, the Greeks, the Egyptians – each had their own currency, and for as long as currencies have existed, people have had a need to convert them so they could exchange goods and trade services for a value that both parties would find acceptable. Without a currency, you would be back to a bartering society, which would become problematic with a growing population and several countries trying to do business together.

There are mentions of traders changing money in the secular Talmudic writings.
Then the Greeks and Egyptians introduced coins of different weights and sizes, containing more or less gold or silver, thus of different values.

A few centuries later, during the Middle Ages, the local currencies were minted and commonly traded. As people started listing the different currencies and their respective values, the Amsterdam Foreign Exchange Market was born.
With that first market and the free import and export of currencies to and from the Netherlands, the exchange rates started to stabilize, but it was the British Empire that regulated currencies, with the coin’s weight in gold being the reference for its value. A system allowing to detect fraud if the coin was not pure gold or silver was also invented.

The gold standard was introduced at the end of the nineteenth century, limiting the countries’ ability to print money to the amount of gold reserves they held. The gold standard ended after WWI in light of the need for many countries to finance their post war industries with printed money.

Forex markets as we know them date from the ’20s and took their modern shape in London.

Post WWII, the U.S. Dollar replaced gold as a reserve currency, and the International Monetary Fund (IMF) was created.

Modern days currency trading is a very active market, with 3 trillion dollars traded every single day just out of London, New York, and Tokyo.  You may not realize it, but you are actually trading currencies in your daily life. When you buy an object online that gets shipped from abroad. When you travel overseas for the holidays. When you buy a plane ticket from a foreign company… All those personal trades are a drop in a sea of currency exchange trades that take place daily. On a bigger scale, countries trade currencies with each other to borrow money and finance public works, to balance their accounts when there is more demand than offer one way or the other, or when they buy products to each other such as gas, metals or even food.

The past decade also saw the birth of digital currencies such as Bitcoins, which are also traded on a daily basis. Those have been highly volatile and disputed as a real currency, but certainly an interesting aspect of the evolution of foreign exchange.

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