Significant milestones in Forex history The Gold Standard

Before money, there was bartering. Money eventually became a more efficient means of trade due to the fact that goods could not be easily divided, and could quickly lose their value, when a value could be determined and agreed upon (Morris 4). Alternately, money could have symbolic value and thus function as a medium for exchange or unit of accounting. Money in its original form consisted of something that was valuable itself such as valuable metals. The metal usually consisted of gold or silver (Eichengreen, 9), and was considered valuable because of both its sparsity and its obvious usefulness.

Both coins and paper money were being used by the nineteenth century. Currencies were not valued directly against each other but rather under a "Gold Standard". Under the gold standard each currency had a specific rate at which the same currency could be considered for a specific unit of gold. This however gave birth to a use full exchange rate between any two currencies.

To illustrate, in 1900 the mint parity for the U.S. dollar was $20.67, while the British equivalent was was 3 pounds, 17 shillings, 10 pence. If one wanted to exchange U.S. dollars for British pounds under the gold standard, one would divide $20.67 by 3.17.10, which yields a rate of $4.86 per pound after taking into account that U.S gold coins contain slightly more gold content than Brittish coins (Aliber, 34).

Following this logic, paper money could be used instead of some precious metal. A citizen could keep with them paper money while the central bank would, in which greater amounts of money exited the country than entered, that would lead o less U.S. dollars in circulation.

Since central banks have heavy influence when it comes to the interest rates (interest rate is a name for the rate at which the bank borrows and lends money), they soon discovered that it was no longer necessary to sit and wait for gold flows to be replenished. In the scenario of a gold deficit where gold is rapidly leaving the country, a central bank would be able to make investing with them more attractive by raising interest rates.

Tags: money bartering efficient trade goods exchange valuable accounting currencies