Currency exchange history might seem like a dusty subject for the hungry new forex trader, eager to start making a profit, but by knowing a bit about the development of the forex trade actually makes it easer to understand the markets underlying principles and how it works. Most things that may seem strange, chaotic or random with today’s FX trade do have their historical reasons for being the way they are.
International trade blossomed during classical antiquity and there was definitely a need for currency exchange. By the 8th century, the Phoenicians – originally expanded from Levantine ports – were engage in full-scale international trade in the Mediterranean.
Examples of currencies that were used during Antiquity are the Greek coins, the Egyptian coins and eventually also the Roman coins. We know from ancient sources that money changers were available, and that they made a living charging a commission on each transaction.
In Talmud, we can read about money changers known as kollybistẻs who were active in Jerusalem where they occupied special stalls. During religious holidays, these money changers would be found at Court of the Gentiles, a bazaar located adjacent to The Second Temple in Jerusalem.
In late antiquity, silver-smiths and gold-smiths often had a side business exchanging currency.
In 5th century A.D the state had a monopoly on currency trade within the Byzantine. Constantinople, the center of this empire, was strategically located between the Mediterranean and the Black Sea, where trade routes from Asia intersected with their European counterparts. International trade, including currency trade, flourished in Constantinople. It was also here that Emperor Constantine introduced the Byzantine gold solidus.
The Medici family of Florence
In the 15th century A.D the Florentine Medici family opened bank offices in several countries, thus creating a vast network of currency trade. A driving force in this development were the many textile merchants involved in international trade.
Amsterdam and the Dutch Golden Age
The Dutch Golden Age was a period in Dutch history, roughly spanning the 17th century, in which Dutch trade was flourishing, and Dutch artists and scientist, as well as the Dutch military, were among the most highly acclaimed in the world. Another thing that was flourishing during this Golden Age was the forex trade in Amsterdam.
Dutch ships would start out from Amsterdam and carry out trade with Africa, Asia, America and the Baltic. The exotic goods they brought back were highly sought after in Europe, and Amsterdam turned into a hub for European commerce. That in turn allowed the rise of Amsterdam as a financial center that included a rather advanced FX trade.
The advent of modern forex trade
The 19th century is often seen as the start for our modern forex trade, partly because the formal gold standard was launched in the United Kingdom in 1821 by the introduction of the gold sovereign. The gold content of this coin was fixed at 1320/5607 troy ounces by the Coin Act of 1816.
Once the United Kingdom has started this process, several countries and territories followed in suit during the second half of the 19th century. Australia, New Zealand and the British West Indies – all regions with strong ties to the United Kingdom – simply adopted the British gold standard instead of launching their own. Others chose to go their own way and adopt their own gold standards. A gold standard was introduced by the United Province of Canada in 1853 and by Newfoundland in 1865. In 1873, both Germany (de jure) and the United States of America put their own gold standards into law. In Northern Europe, Sweden and Denmark formed the Scandinavian Monetary Union in 1873 and fixed their currencies against gold at par to each other. Norway entered the union two years later by pegging its currency to gold at the same level as Sweden and Denmark.
Two important players on the forex scene during the 19th century were Alex. Brown & Sons in the USA and J.M. do Espírito Santo de Silva (Banco Espírito Santo) in Portugal.
London in the early 20th century
It was during the early 20th century that London really emerged as a hub for forex trade, carving out a niche for it self in a field that – at the end of the 19th century – was dominated by players in Berlin, Paris and New York.
In 1902, there was just two official forex brokers in London. Twenty years later, there was 17 official forex brokers in London, and by 1924 there were 40 registered currency exchange companies in the capital. One example of an important player during this era is the Kleinwort family.
By the end of 1913, nearly 50 percent of all forex trade in the world involved the pound sterling. This development went hand in hand with London’s emergence as a center for finance. In the year 1860, only three foreign banks had a London office. By 1913, that number had rose to over 70.
The Bretton Woods System
The Bretton Woods System was the first fully negotiated monetary order intended to govern monetary relations among sovereign and independent nations.
The Bretton Woods agreement was signed in July 1944, while World War II was still raging and delegates from 44 Allied nations had gathered in Bretton Woods, United States to attend the United Nations Monetary and Financial Conference.
Each country that entered into the Bretton Woods system was obliged to adopt a monetary policy where its currency was tied to gold. The currencies were only allowed to fluctuate within a range of 1 percent. As a part of the system, the International Monetary Fund (IMF) was established.
In 1971, the United States of America unilaterally abolished the gold standard for the United States Dollar and this market the collapse of the Bretton Woods System. The system with fixed rates of exchange was gradually replaced by a free-floating system.
The rise of Tokyo
Throughout the 1950s, Japanese law was change several times to accommodate the forex trade. Tokyo emerged as an eastern hub for FX trade, especially for South-East Asian currencies.
1981 was an important year in this region, because the South Korean government abolished forex control and the People’s Bank of China allowed certain domestic enterprises to participate in foreign exchange trading.
The Smithsonian Agreement
After the collapse of the Bretton Woods System, the Group of Ten signed the Smithsonian Agreement in December 1971. The United States pledged to peg the United States Dollar at $38/ounce while certain other countries pledged to appreciate their currencies versus the dollar. A permitted trading range of 2% was established.
(The Group of Ten had been established nearly ten years earlier by the United States, Canada, the United Kingdom, France, Italy, Belgium, the Netherlands, Germany, Sweden and Japan. Switzerland entered in 1964, but the name G10 remained unchanged.)
The Smithsonian Agreement stipulated that the involved currencies would be pegged to the United States Dollar, but when the USD price in the gold free market sunk, a lot of pressure was put on the official USD rate. On Valentines Day 1973, a 10% devaluation of the USD was announced. This prompted both Japan and the EEC countries to abolish the peg to the USD and allow their currencies to float instead.