We touched last week on how countries asserting domination on minting coins paired with the Commercial Revolution led to a rise in cross-border trade and thus the need for FX. We also mentioned how this was carried out on an international scale by mainly Italian merchant societies.

In relation to minting coins, Italy has an extensive history of different coinage types, which spans thousands of years. Italy has been influential at a coinage point of view: the florin, one of the most used coinage types in European history, was struck in Florence in the 13th century.

The Commercial Revolution comprised of an European economy based on trade, which started in the 11th century and continued until it was succeeded by the Industrial Revolution in the mid-18th century. Beginning with the Crusades, Europeans rediscovered spices, silks, and other commodities which were uncommon in Europe.

The original banks were “merchant banks” that Italian grain merchants created. As Lombardy merchants and bankers grew in stature founded on the strength of the Lombard plains cereal crops, many displaced Jews escaping Spanish persecution during the Crusades were attracted to the trade. They brought with them ancient practices from the Middle and Far East silk routes. Initially envisioned to bankroll long trading journeys, they applied these methods to fund grain production and trading.

This development created a fresh desire for trade, and trade expanded in the second half of the Middle Ages. Newly forming European states, through voyages of discovery, were looking for different trade routes in the 15th and 16th centuries, which permitted the European powers to build huge, new international trade networks hence the new found need for foreign exchange.

The Avignon Exchange was one of the first foreign exchange markets in history, established in the ‘Comtat Venaissin’ during the Avignon Papacy. The Exchange was made up of the agents of the great Italian banking-houses, who acted as money-changers as well as financial intermediaries between the Apostolic Camera and its debtors and creditors.

The wealthiest quarter of the city of Avignon, where the bankers settled, became known simply as the Exchange. According to de Roover, “Avignon can be considered an Italian colony, since the papal bankers were all Italians”.

Our blog next week will investigate the origins of foreign exchange more deeply, going all the way back to the earliest known foreign exchange contract which occurred in Genoa in 1156.

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