A Brief History Of Foreign Exchange Markets.

Early Origins,

Trading of goods and services has evolved over thousands of years.Initially,barter functioned as the method of payment,and primitive as it was,it helped achieve the basic objective of allowing exchange of goods and services among the countries of the world.

Some 4000 years ago,considerable progress was made through the development and use of coins bearing the stamp of a banker,merchant,temple,sultan or king.The use of monetary metal gradually became commonplace in international trade.Initially,value was determined according to the value of the metal in the coins themselves.However,as the number of coins in circulation increased and confidence in their value as a medium of exchange grew,professional money changers in the ancient Middle East were able to exchange certain coins on the basis of the coins themselves.With this development,a crude form of foreign exchange trading has begun.

After the collapse of the Roman Empire and throughout the dark ages,the frequency of foreign exchange transactions declined because of unstable financial and political conditions and a widespread reduction in foreign trade.By the eleventh century ,however,money changing was back in vogue.As international trade and capital flows increased,physical exchange of coins became les and less practical.

To meet the needs of the increase in international commerce, a form of international merchant banking evolved.The merchant banks opened branches and developed formal relationships with correspondent banks in other trading countries.Bills of exchange which are unconditional orders in writting directing the addressee to pay a third party a specific sum,became transferable.When the payee of the bill of exchange could transfer value to a third party,a new form of currency was created.This development gave the market enhanced flexibility and led to sizable increases in foreign exchange dealings.As travel became easier and faster ,increased use of bank transfers further encouraged development of the markets.The market had now moved from a pure cash system to a combination of cash and credit.

In general,the growth of the foreign exchange market during the second millennium had many problems to overcome in addition to slow difficult communication and travel.For instance the church for many years frowned on such activities and governments , in some cases considered dealing in foreign exchange not only unethical,but illegal.In the late 1800's ,a cable was laid across the Atlantic providing a great improvement in communication between Europe and North America,and marking perhaps the beginning of the global financial markets as we know them today.

Patrick Abboud
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