Currency trading and exchange goes all the way back to ancient times. They were essential tools for trade in the ancient world, as they allowed people to purchase and peddle items such as food, pottery and raw materials.
If a Greek coin held more gold than an Egyptian coin due to its size or content, then a trader could exchange fewer Greek gold coins for more Egyptian ones, or for more physical goods. Because of this, at some point in their past, the majority of currencies in the world that are still in use today had a value fixed to a definite quantity of an accepted standard such as gold.
The establishment of the gold standard monetary system in 1875 is one of the single most important events in the history of the FX market. Prior to the gold standard, countries would generally use gold and silver to make international payments. The key issue with using gold and silver for payment is that the value of these metals is hugely affected by global supply and demand.
Therefore, gold standard was introduced so that governments were assured the exchange of currency into a specific amount of gold, and vice versa which means the currency was backed by gold. Understandably, governments needed a fairly large gold reserve to enable them to meet the demand for currency exchanges.
In the late 19th century, all of the main economic countries had secured a certain quantity of currency to an ounce of gold. Gradually, the difference in price of an ounce of gold between two currencies then became the exchange rate for those two currencies. This signified the first official means of currency exchange in history.
Meanwhile today, FX is the biggest financial market, as the globalisation of trade and finance requires exchange between the different currencies of sovereign nation-states or currency areas.
We can trace the roots of our modern FX markets back to the rise of kingdoms and principalities (many of which would form the basis for today’s nation-states), each asserting domination on minting coins within its land, combined with the ‘Commercial Revolution’ of the thirteenth century, which led to a rise in cross-border trade and thus the need for FX.
This was carried out on a local scale by money-changers and on an international level by (mainly Italian) merchant societies. Our blog next week will explore in depth the role these societies played in the development of the FX markets.
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