Currency Exchange History Rate

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Currency Exchange History Rate

The world of foreign exchange has come a long way from very humble beginnings. Find out more about the history of foreign exchange.

Before the use of currency, on a global level, nations used to trade goods directly by paying for one good by exchanging it for another which was a normal practice within the boundaries too. Due to its numerous advantages, money was eventually created to facilitate trading.

Earlier, trading partners used a common form of money- gold or silver to conduct their business. Eventually, after the benefits of paper currency became evident still the currency couldn’t leave a mark in international trading.

This was because each country issued its own currency and the financial international community was not able to take much benefit from it. In view of the fact that the purchasing power of each currency differed considerably and could differ over a certain period of time depending on how much currency the countries issued.

Therefore, foreign exchange is the series of solutions that allowed countries to issue their own currency and to conduct their own monetary policy. Moreover, while allowing international trade to be conducted by providing a means of exchanging one currency for another according to the exchange rate between them, which was either agreed-upon or set by the market.

Money, Currency, and Foreign Trade

One of the qualities that money or paper currency requires is that it is scarce. It is so because if it were not, it would have no value as money.

In the past, many different items were used in the form of money till the time; people began to discover gold as the ideal as well as most favorable material for money. This happened because this shiny yellow metal could not be either manufactured or printed, neither can it be easily mined nor was it easy to find new sources of gold.

At the same time, it was also the most ductile and malleable of metals that are easy to fashion into coins. But gold was heavy in comparison to other metals, while severely limiting the quantity a person could carry. It’s because a 10 dollar gold piece would be 10 times heavier than a 1 dollar gold piece.

So, governments decided that the printed currency, generally known as bills or notes , was the solution. Although a good solution, paper money still had its own set of problems. The major question was what would prevent anybody from just printing money? Governments solved this problem by using secret methods of printing money and subsequently passing harsh laws to punish anyone who would try to engage in such fickle activity.
Fixed Exchange Rates

Before there was significant trade between countries, there was little need for foreign exchange. However, whenever the need occurred, it was served by gold, since gold was used by most of the countries. On the other hand, as trade further expanded, there was a need to exchange currency rather than gold because gold was heavy and difficult to transport from one place to another. But how could different countries equalize their currency in terms of another currency. This was achieved by equalising all currencies in terms of the amount of gold that it represented—the Gold-Exchange Standard .
Gold-Exchange Standard and its subsequent collapse

This system prevailed from 1879 to 1934, under this, the value of the major currencies was fixed in terms of how much gold for which they could be exchanged, and thus, they were fixed in terms of every other currency.

The main problem with the gold standard was that if a country was not competitive in the world marketplace, it would lose more and more gold as more goods were imported and less exported. With less gold in stock, the country would have to contract the money supply, which would hurt the country’s economy.

The foreign exchange market (fx or forex) as we know it today originated in 1973.

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