1)When did nations first use exchange rates?
2)How did they calculate the conversion ratio?
3)How often were rates updated?
Thanks, Kid
Exchange rates are akin to the barter system, and been around since time immemorial or at least since there was a form of intangible currency such as notes or dollar bills.
I think you need to reformulate the question. Are you talking about the modern banking system and roughly when would you consider that to be? How often rates were updated depends even today on whether it is retail banking or via the currency market.
Back when all countries’ currency was made of (or exchangeable for) silver (or gold), there wasn’t much question what the exchange rate should be. For example, for over a century the British Pound Sterling contained about five times as much silver as the U.S. dollar, so the exchange rate remained exactly the same for a very long time.
Even well into the 20th century currency exchange was a sticky business. In the 1920s, American economic dominance helped the Yanks set an international agenda for currency exchange – namely to get the entire globe on the Gold Standard, since the U.S. had enormous gold reserves after WW1. This ticked off at least a few countries, notably Britain. But the U.S. plan went through, especially after most other nations went along with it (the Brits had to, begrudgingly, after even their colonies [e.g., S. Africa] went Gold Standard). So perhaps a big part of it required certain international standards to be in place first?
For cite-mongers, check any number of Frank Costigliola’s articles on the int’l economy of these years.
So my guess is that readily available conversion did not begin to take its modern form until the 1920s or so.
Exchange rates go back a bit. However, they took rather different forms from what we know today. Here are a couple of examples from US history.
- Gold vs. Silver. As bibliophage notes, international exchange rates for currencies made out of gold were rather dull. If an British Pound coin contained five times as much gold as an American dollar coin, then the exchange rate was five dollars to the pound, simple as that. The only changes would come when governments changed how much gold went into a coin (which generally happend when the government needed cash.)
However, comparing the value of gold coins to silver coins was far more tricky, because the price of gold compared to silver kept fluctuating. A large discovery of silver ore, for example, would cause the price of silver to plummet, making gold coins relatively more valuable.
This was an especially big problem for the US during the 19th century, because the US dollar had a policy of bimetallism – the US dollar was defined as both a specific amount of gold, and a specific amount of silver. Since the price of gold vs. silver kept fluctating as miners made new discoveries of gold and silver, the US government had to keep changing the official mint ratio. This caused the famous bimetallic controversy and the epic struggle between Bryan and McKinley in the election of 1896, better known to generations of history students as “that really confusing and boring stuff that puts me right to sleep.”
- Free Banking banknotes. Individual local banks could actually issue their own paper money in the US during the mid-19th century. (This was called the “Free Banking era.”) A $1 banknote from the Bank of Hicksville could be exchanged at the Bank of Hicksville for a dollar in gold.
So a $1 banknote was worth a dollar, right? Well, no, for two reasons. The first reason was distance. Being being able to exchange a Bank of Hickville banknote for gold in Hicksville wasn’t terribly useful if you were thousands of miles away from Hicksville. The second reason was risk. It’s possible that the Bank of Hicksville might go under before you could redeem your banknote. For both reasons, a $1 banknote was almost always worth less than a dollar in gold in everyday transactions.
Hundreds of different banks issued their own banknotes, and each bank had a different location and financial situation. Hence you needed exchange rates if you wanted to swap, say, Bank of Hicksville bank notes for Bank of Smalltown bank notes. These exchange rates worked very much like modern exchange rates–they were reported in the financial press, they fluctuated from day to day, etc. However, these were intra-national, not international, exchange rates.
Originally, there were no exchange rates. A gold coin from any nation could be used in any other nation to buy goods.
That’s how England got Guineas and the American Colonies got Pieces of Eight.
It was Bryant, as in William Jennings Bryant, not Bryan. And anyone who can’t get something out of the ‘Cross of Gold’ speech is braindead.
IMHO.
Actually, this implies a very simple exchange rate: ‘How many of these things for that thing?’
AKA the barter system.
I’ve attached a link that explains the Bretton Woods international currency exchange system, which ran from post ww2 until 1971 when everything went to floating exchange rates.
During the time of the British empire, most of the colonies and commonwealth nations had a currency board system. Simply put, a local currency was issued at a fixed exchange rate, and a corresponding amount of British pounds were taken out of circulation and held in reserve by the issuing bank. Hong Kong is still run under a currency board system (more accurately the something-Hume system). http://www.riia.org/briefingpapers/bp57.html
I mention Hong Kong, because when the currency was set (under a currency board system, a currency is not pegged per say), in 1978, the powers that be threw darts and came up with USD1=HKD8 as a good rate. The person that actually set it said something like “poppycock, if we pick such an obvious round number no one will believe we calculated it and came up with a round number. Let’s call it USD1=USD7.78.” And that’s how it came to be.
I never followed the Euro debate. I can’t find a handy chart but it was fixed at something like USD1=E117 on Dec 31, 1998, dropped to about USD1=E0.83 and now USD=E0.893
If you care about how the Euro was set, here’s a simple explanation: http://pacific.commerce.ubc.ca/xr/ECU.html If you want more detail, you can find it here: http://www.bankofengland.co.uk/qb/effexin.pdf
How often rates are updated depends. A lot of retail banks will update once a day even now, and some are live. If you are in a more remote place, say like the hills of Nepal, you might run into a bank that updates off of a few day out newspaper. You might see the bank have to call a larger branch to get a rate.
Actually, it’s Bryan which is correct. See, for example, William Jennings Bryan’s Cross of Gold Speech, 1896.
Back in the Renaissance, exchange rates were manipulated to function as loans. Back then it was often illegal to charge interest for lending money, but currency exchange was allowed. So a special form of currency exchange was used to cover the lending of money.
Let’s say the five guilders was equal to three florins. So if we agreed I was going to give you 400 florins for 500 guilders, I’d normally look like an idiot. But if you were giving me the guilders today and I didn’t have to give you the florins until next month, we would have effectively arranged a one month loan with 33% interest.