HISTORY OF MONEY – How did international exchange rates come to be? 

Exchange rates are not just numbers on the screens of banks and stock exchanges, they are dynamic indicators that reflect the health of economies, political situations and international relations. They play a key role in global trade and investment, but how did they come about? To answer that question, in today’s Strifor review we take a fascinating journey back in time and look at how and why international exchange rates evolved.

Antiquity: the first forms of currencies

It all started long before modern currencies existed. The history of exchange rates began with the first money. In ancient civilizations such as Mesopotamia, Egypt, China, and India, goods such as grain, livestock, and jewels were used instead of money. Merchants swapped goods depending on which items were most valuable. In ancient Babylon, for example, there was a system of exchange based on silver, and this was already a kind of first currency.

However, the most important step towards international exchange rates was the introduction of coins. The first coin was minted in Lydia (territory of modern Turkey) around 600 BC. These coins became a more convenient means of exchange, and since then gold and silver have played a crucial role in international trade.

The Middle Ages: the gold standard and the rise of trade

Over time, coins became a symbol of wealth and power, and nations began to introduce their own currencies. During the Middle Ages, gold coins became especially important. European countries such as England and France issued their own gold coins, and these served as the basis for exchange and trade.

However, the real era of international exchange rates began in the 19th century when the gold standard was introduced, a system in which currency was backed by the gold reserve. This meant that the price of a currency depended directly on the amount of gold held by central banks. The gold standard provided stability in exchange rates and was used by most countries in the world, creating a basis for international trade.

The 20th century: the transition from the gold standard to fiat currencies

World War I and the Great Depression of the 1930s disrupted the stability of the world economy. The gold standard system was threatened, and countries began to move away from pegging their currencies to gold. In 1944, the Bretton Woods Conference created a new currency system based on the U.S. dollar. The US became the center of the world economy and the dollar was pegged to gold (at a rate of $35 per ounce). The other currencies were pegged to the dollar, which provided stability in exchange rates.

However, this system proved to be unstable. In 1971, the U.S. abandoned the pegging of the dollar to gold (the so-called “Nixon shock”), which led to the transition to a system of floating exchange rates. At this time, currencies began to be determined not by the government’s gold reserve, but by market conditions: supply and demand. This became the basis for modern currency markets.

1970s-2000s: the rise of currency markets

After the abandonment of the gold standard, currencies became freely exchangeable for each other in markets. The creation of large international financial organizations such as the IMF (International Monetary Fund) and the World Bank also contributed to the globalization of exchange rates. Central banks began to intervene in foreign exchange markets in an attempt to regulate exchange rate fluctuations, but at the same time mechanisms were introduced to exchange currencies at market prices.

In the 1980s, with the development of information technology, foreign exchange markets became more accessible to large multinational corporations, banks and individual traders. This led to an increase in trading volumes in foreign exchange markets and the emergence of new instruments such as currency futures and options.

Modernity: cryptocurrencies and digitalization

The 21st century has become the era of digitalization, and the currency markets have not been left out of this process. In recent decades, the world has witnessed the emergence of new forms of money – cryptocurrencies. Bitcoin, released in 2009, was the first decentralized digital currency. It created a new category of currency that was independent of central banks and states, and hundreds of other cryptocurrencies soon emerged.

Today, many factors continue to determine international exchange rates: economic policies of nations, trade relations, inflation, interest rates, and even technology news. Modern currency markets are also influenced by algorithmic traders powered by artificial intelligence.

Interesting Facts

1. The US dollar is a currency that holds about 60% of the world’s foreign exchange reserves. Its stability makes the dollar the preferred instrument for international settlements.
2. The Swiss franc has always been considered one of the most stable and inflation-proof. Many investors buy francs during world crises as a safe haven.
3. Bitcoin is the first currency that is completely decentralized. It does not depend on the government or central bank, which makes it unique from traditional currencies.
4. The theory of “purchasing power parity” (PPP) states that long-term changes in exchange rates occur due to differences in the prices of goods and services in different countries. For example, if inflation is higher in one country, a currency will lose value against other currencies.

To summarize

International exchange rates have come a long way from the simple exchange of goods in antiquity to high-tech financial markets. Their development is linked to changes in the world economy, politics and technology. Today exchange rates are not just numbers, but indicators that help to understand the state of the world economy and what the future holds.

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