Introducing Foreign Exchange

Gold and silver particularly had an 'international' value and acceptability in the early ancient world. Hoards that have been unearthed indicate that some collectors amassed the coins of more than one nation, perhaps in the course of primitive foreign transactions.

Primitive bills of exchange arising from trade are known to have existed in Babylonia, and the Code of Hammurabi made provision for them. Early foreign exchange markets consisted of meeting places of money changers and were found in the ancient Middle East, Greece, and Rome.

Already during the first millennium B.C., foreign exchange, handled through the money changers, appears to have facilitated the foreign commerce of the period.

Such exchange dealings did not escape the general decline in civilization that characterized the Dark Ages. By the eleventh century, however, money changing had again become an important occupation over much of the-developed world.

The growing importance of trade and industry rendered exchange transactions by means of the manual transfer of coins and bullion increasingly inadequate. Consequently, international payments began to be effected by various forms of paper credit instruments, and that practice grew in importance.

The origin of international bills of exchange is usually ascribed to the Jews, who were expelled from time to time from various countries of Europe, and to the Guelfs, who were forced by the Ghibelines to leave Italy. Member of those two groups attempted to recover at least a part of the value of the property that they were forced to leave behind.

They put the goods in the hands of trustworthy friends and later drew bills on them, which they then sold to merchants dealing in the goods involved. In the Middle Ages, letters of credit were issued to the Crusaders by Italian merchant-bankers who had branches in the Levant areas that were in Christian hands.

By the end of the fifteenth century, a relatively modern system of foreign exchange was already in operation.

The principal changes that occurred during the sixteenth to eighteenth centuries were: one, the development of forward exchange, or the purchase and sale of exchange for future delivery, to be used as a cover against changes in spot exchange rates; two, the growth of international investment; three, the increase in number of foreign exchange markets; four, the larger role played by banks; and five, the increased transferability of bills of exchange.

The nineteenth century was characterized by the use of finance bills, or bills designed to accommodate the international movement of capital. Telegraphic and cable transfers started to replace the slower mail transfers as international communications improved. Banks established closer relations with other banks overseas and displayed a greater degree of interbank cooperation.