Beginnings in Gold - Roots Of The Foreign Exchange
Let's take a leap back in time and see the beginnings of monetary systems and the roots of the foreign exchange. Monetary systems anciently have both gold and silver as standards in determining the value of currencies. Knowing this would bring an understanding of these centuries old systems and an appreciation of today's standards.
More than 4,000 years ago silver was the metal that was used as a currency. Silver Ingots was the currency used for trade back then. Around 600 BC gold coins began to be used for trade as a currency, though long before this time it was already used in Akkadia and Egypt. Though gold was truly prized, its scarcity paved the way for silver as a common currency for ordinary transactions. Even in the 20th century some countries still use this metal as part of their currency.
Since the Persian Empire collected taxes in the form of gold, it became the basis for Alexander the Great's coinage since his conquest. The Roman Empire circulated 2 gold coins, first was the aureus (an alloy with 7 grams of gold), and the solidus (a 4.2 gram gold alloy). This was used until the fall of the empire and until the gold mines in Europe became exhausted.
The successor to the solidus was called the nomisma (otherwise known as the bezant), which was circulated in the Byzantine Empire at the fall of the Western Roman Empire. During about the 11th century the nomisma dropped in real value due to the reduction in gold to about 15%.
The Arab empire produced the dinar during the late 7th century. It had the same size and weight as the solidus. Both the solidus and the dinar would be in circulation for another 350 years until the solidus finally was no longer in use.
The Republic of Venice minted its gold coin in 1284. This was known as the ducat. It would become the European standard coinage for 600 years. The ducat during this time period became the standard to which all other coinage systems were compared. Other coins from other states and countries were used for trade. But since Venice was able to secure trade with the Islamic world it had an abundant source of gold thus facilitating the strength of the ducat.
In 1566 Spain introduced the escudo until 1833. Due to the conquest of the Aztec and Inca Empires, Spain was able to obtain a tremendous stock of gold. The escudo was worth 16 reales. Gold became the legal tender in 1704. The US dollar would be based on the Spanish silver reale since Spanish coins would still be in wide circulation when the US dollar would be introduced.
We have just discussed the rise and fall of different currencies. Different economic and national forces affect the strength and decline of different currencies. Though the standard has shifted away from gold and silver, yesterday's market movers have modern day counterparts. Looking into the past opens a window to understand the future.