History of Foreign Currency

Some of the earliest currencies can be traced back to the Middle East around 5000 years ago, these were Gold Bars and Gold Rings. In 650BC coin was first minted in Ephesus, using an alloy of Gold and Silver and these were struck with an image on one side. At this time China was also creating coin, cast from bronze and formed into more complex shapes. The early Chinese round coin with a square hole did not occur until the late 3rd century BC.

The Greeks produced the earliest European currencies, plus the concept of credit and debt, to facilitate movement around the country without needing to transport quantities of coin. As time progressed, the Romans adopted and formalised the Greek system and this has formed the basis of today’s currencies.

Paper money first occurs in China in 910AD, but because the Emperors could print it freely, major inflation occurred and it was abolished in the 15th century (history hasn’t taught us much).

Sweden introduced the first European paper notes and also the first bank. Stockholm Banco was established in 1656 and introduced a paper note which could be exchanged for a fixed value in silver coins. Again inflation destroys the system, when the banks owner; Palmstruch prints more notes than he could secure with cash. In 1667 the system collapses and he is imprisoned for fraud.

There are many further developments of paper money, all having problems until the British Government introduced the Gold standard in 1821.

International trade has always involved exchange of items of value, everything from Cowrie shells in Africa to Wampum in America. It was just a matter of attributing a common value and all has had its problems until the Gold Standard arrived.

In the early 20th Century, the Pound Stirling was the principal currency and the centre for foreign exchange was London. The Second World War saw the demise of his, with the Gold pegged $US taking over.

In 1944 the Bretton Woods Accord gave rise to two significant elements of the Foreign Currency Market, it struck an agreement whereby no other currency was allowed to fluctuate more then 1% in relation to the $US. If excessive fluctuation did occur, the central bank which controlled the fluctuating currency had to step in to stabilise it, and it gave rise to the creation of the IMF – The International Monetary Fund.

The IMF took on the role of a World Finance Legislator, producing a stable system for the sale of currencies, promotion of world trade and providing financial resources to member countries with the requirement that changes be undertaken to rectify the situations causing the need for financial assistance.

In 1978 the IMF proposed that currencies become ‘Free-Floating’, this allowed currencies to be traded freely and values determined by both supply & demand and the country of origin’s economic stability, productivity or what ever the international marketplace deemed appropriate.

In 1979 the European Monetary System was born, but the British decided to keep out of the economic conglomerate and when the Euro was adopted in 1998 as the European Currency, The British hung on to the Pound Stirling. This action gave the Forex an additional trading currency GBP. Now the Forex had EUR/GBP, GBP/USD, GBP/CHF, GBP/CAD and others, but many will notice that when comparing cross Atlantic currencies , some charts can follow very similar trends.

When currencies were free-floated in 1978 the Forex traded around US$5billion per day, at the beginning of 2009 that has risen to around US$4trillion. It is now the biggest trading market, eclipsing all the stock markets combined.