The History of Money Exchange
Everyone’s looking for more of it but have you ever wondered where money actually comes from?
Today we’re sharing some interesting stories that play a part in the history of currency exchange.
To see the evolution of money, click on the image over on the right or click here: history of currency exchange infographic.
By the way, if you’d like to know more about the cheapest, safest and fastest way to send money abroad, click here: learn more about CurrencyFair.
Currency exchange began with bartering, people would exchange goods or a service that they could offer, for goods or a service that they required.
However, problems arose with this system, when people did not want what the other person had to offer. To solve this problem, a commodity based money system was invented. Using basic items that everyone used on a daily basis as currency.
Due to the cumbersome and also often perishable nature of commodity money an alternative was needed. Around this time metal objects started to be utilised.
These metal objects began to get more and more refined. Cast bronze was being used in the society of China.
Coins were first manufactured concurrently in China, India and Lydia (Turkey).
Other western empires (Greek, Persian, Macedonian and Roman) were soon minting their own series of coins with specific values. Metal was used because it was readily available, easy to work with and could be recycled. Since coins were given a certain value, it became easier to compare the cost of items people wanted. These new coins were composed from scarce metals such as bronze, gold, and silver, which had a lot of intrinsic value.
Currency exchange was also in effect here. As the coins were based on rare metals merchants could set their prices accordingly. This is why the vast majority of world currencies are derivatives of a universally recognized standard like silver and gold.
Banknotes in the form of leather money came into use in China. One-foot square pieces of white deerskin edged in vivid colours were exchanged for goods. This is believed to be the beginning of a kind of paper money.
Money was evolving into representative money around this time, with the introduction of paper currency and non-precious coinage. This meant that what money itself was made of no longer had to be very valuable. Representative money was backed by a government or bank’s promise to exchange it for a certain amount of silver or gold. For example, the old British Pound bill or Pound Sterling was once guaranteed to be redeemable for a pound of sterling silver.
During the ninth century, the Danes in Ireland had an expression “To pay through the nose.” Back then it had a very literal meaning, anyone not paying their Danish poll tax would lose their nose!
Some of the earliest known paper money dates back to China, where the issue of paper money became common from about 960AD onwards.
The Italian Medici family opened banks at foreign locations in order to help textile merchants. They kept records in Italian and local currencies, holding accounts with foreign banks.
There are records in Amsterdam showing that foreign exchange was taking place now (and likely earlier) between England and Holland.
England made gold a benchmark of value. This meant that the value of currency was pegged to a certain number of ounces of gold. This would help to prevent inflation of currency. For most of the nineteenth and twentieth centuries, the majority of currencies were based on representative money through the use of the gold standard.
On March 10, 1862 the first United States paper money was issued. The denominations were $5, $10, and $20. They became legal tender by Act of March 17, 1862.
The U.S. went on the gold standard.
At the time of the closing of the year 1913, nearly half of the world’s foreign exchange was conducted using the Pound sterling.
Hyperinflation occurred in the Germany between June 1921 and January 1924. This was as a result of Germany firstly suspending the convertibility of its currency to gold to help pay the massive costs of the First World War. This meant that money used to pay for the war had all borrowed, this devalued the mark against the dollar. This devaluation was then accelerated following the Treaty Of Versailles, and the London Ultimatum, which demanded Germany pay massive annual reparations in gold or foreign currency. In order to buy the foreign currency, Germany began printing enormous amounts of paper money, continuing the rapid devaluation, until by the end of 1923 a single US dollar was worth 4,210,500,000,000 German marks.
End of gold standard. The Wall St Crash (1929) and subsequent massive depression of the 1930s, which was felt worldwide, marked the beginning of the end of the gold standard. In the United States, the gold standard was revised and the price of gold was devalued. This was the first step in ending the relationship altogether. The British and international gold standards soon ended as well, and the complexities of international monetary regulation began.
After WWII, the Bretton Woods Accord was signed to value a troy ounce of gold at $35 and peg all other currencies to this, allowing them to fluctuate within a range of 1% to the currencies par. This would protect against hyperinflation.
The Diners Club issued their first credit card in the United States, a method of paying in restaurants using credit.
American Express issue first credit card.
President Nixon is credited with ending the Bretton Woods Accord, and fixed rates of exchange, bringing about eventually a free-floating currency system.
The Nixon Shock of 1971 ended the convertibility of the United States dollar to gold. Since then, all reserve currencies have been fiat currencies, including the U.S. dollar and the Euro. Fiat money was first used in China about a thousand years ago. Fiat money has been used intermittently by various countries since, concurrently with currencies that were backed by metals, primarily silver or gold. After World War II, the Bretton Woods accord set up a world-wide system of currencies that was pegged to the US dollar, while the US dollar was itself pegged to gold. Money is now given value by a government fiat or decree, in other words enforceable legal tender laws were made. By law the refusal of “legal tender” money in favour of some other form of payment is illegal.
Fiat is the Latin word for “let it be done”.
Reuters introduced computer monitors, replacing the telephones and telex used previously for trading quotes.
In fact 1973 marks the point to which nation-state, banking trade and controlled foreign exchange ended and complete floating, relatively free conditions of a market.
Satoshi Nakamoto released the first Bitcoin client and issued the first Bitcoins. Bitcoin is a crypto-currency relying on cryptography to protect against counterfeit production. Individuals can “mine” Bitcoins by setting up their computers to solve complex maths problems that benefit Bitcoin. They are rewarded for this with Bitcoins.
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