To truly understand currency exchange and the important place it plays in our modern globalised world, we need to look back in time to the development of the first currencies, and take in some interesting facts about money along the way.
History and Evolution of Money
The first physical currency in the world is generally held to have been created by King Alyattes of Lydia around 600BC (modern day Turkey). Although this in itself was a progression from bartering for goods, which has been going on around the world for over 10,000 years.
Bartering began as a way of exchanging goods, such as pottery or livestock, for other goods, often with another tribe or rival empire. Such transactions enabled people to acquire goods in exchange for items they had in surplus. The creation of a formalised currency was a logical extension of this, allowing the cost of things to be set at a standardised rate using coins made of precious metal, and later notes of printed paper.
The transformation of barter into currency-driven trade enabled people to better work together in complex societies, share resources fairly, and to store the rewards of labour and the profits of sale. It provided a medium through which people could buy and sell goods and services, without being restricted to whether you had a good that the other party wanted. It also meant that prices could be set for specific things, and so each individual could buy an item for the same price as his neighbour, haggling notwithstanding.
Types of Currency – From Edible to Electronic
Over time, the nature of currencies and their purpose have shifted along with the societies that utilise them. The history of money and its types can be divided roughly into four different forms
Commodity – In the agricultural era of civilizations, people generally traded things that were useful, or had intrinsic value to themselves, and so commodity currencies included things like gold, precious jewels and salt. Commodity currencies are still used by some tribal societies today, such as on the island of Yap in Micronesia, where commodities used include shells, cloth and ‘reng’ – an edible ball of turmeric.
Coin – The first coins were made from more-or-less uniformed sized discs of electrum – a mix of gold and silver. These were stamped with the seal of the Lydian empire, and this trend of stamping an official state emblem on currency continues to this day. It was also the first example of the value of a currency being supported by the state itself, and effectively gave control of the currency to the state.
Paper – While the use of precious metals in trade represented a subtle shift in the idea of swapping items of value, the introduction of paper money by states backing their worth (firstly in China in the 7th century AD) introduced an element of the abstract, and a promise that the bearer would be paid its value. Until the latter half of the 20th century, paper money represented actual gold held in banks, and it was in England that currency was first pegged to gold.
Electronic – With the development of rapid means of global communications (and the transformation of currency into trust rather than value-based transactions), the need for physical money has diminished. From credit cards and online banking transactions to the development of cryptocurrencies such as Bitcoin (developed by the elusive Satoshi Nakamoto in 2009), currency has now moved firmly into the digital age.
As you can see from these facts about the history of money, the exact nature of currency has evolved considerably over the years, and one of the biggest motivators for this has been to exchange one thing for another. Before currencies developed, this relied on a ‘coincidence of wants’, in which the two people exchanging goods wanted the items that the other had. Currency provided a more versatile medium for carrying out transactions, where person A could sell an item to person B, and then exchange the money they received for other goods they wanted from person C, D or even E.
As we continue to progress deeper into this globalised electronic phase of currency, Forex trading, in which one currency is exchanged for another, also has an important part to play. With a long history, the Forex market is the largest financial market in the world and facilitates rapid trading in currencies across international boundaries. This enables people around the world to take advantage of fluctuations in the value of different currencies, such as the relationship of the Chinese Yuan to the British pound during the forthcoming Brexit process.
To delve further into the history of currency trading, take a look at our dazzling infographic below.