NISM Hyderabad : History of Forex Markets : AS Chakravarthy

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Brief history of Forex (Foreign Currency Exchange)

The Current Currency rate system has advanced more than a large number of years of the world group attempting with different component of encouraging the exchange of merchandise and enterprises.

Initially, the trading of goods and services was by barter system where in goods were exchanged for each other. For example, a farmer would exchange wheat grown on his farmland with cotton with another farmer. Such system had its difficulties primarily because of non-divisibility of certain goods, cost in transporting such goods for trading and difficulty in valuing of services.

For example, how does a dairy farmer exchange his cattle for few liters of edible oil or one kilogram of salt? The farmer has no way to divide the cattle! Similarly, Therefore the need to have a common medium of exchange resulted in the innovation of money.

People tried various commodities as the medium of exchange ranging from food items to metals. Gradually metals became more prominent medium of exchange because of their ease of transportation, divisibility, certainty of quality and universal acceptance. People started using metal coins as medium of exchange. Amongst metals, gold and silver coins were most prominent and finally gold coins became the standard means of exchange. The process of evolution of medium of exchange further progressed into development of paper currency.

The growth in international trade resulted in evolution of foreign exchange (FX) i.e., value of one currency of one country versus value of currency of other country. Each country has its own “brand” alongside its flag. When money is branded it is called “currency”. Whenever there is a cross-border trade, there is need to exchange one brand of money for another, and this exchange of two currencies is called “foreign exchange” or simply “forex” (FX).

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