In the past, the value of goods and services were expressed in terms of other goods.This exchange system was called the barter system.The first coins to be used as a medium of exchange were made from gold and silver. Later on, during the Middle Ages, people began to use paper money to exchange value as an I.O.U. However, the foreign exchange industry itself is the newest of the financial markets.
During the last century, the foreign exchange market has undergone some dramatic transformations.
Central banks supported their currencies through convertibility to gold.Paper money could be converted into gold on request to the bank. Since it was not likely that all holders of paper money would request gold at the same time, banks only needed to keep a determined amount of gold on hand in order to handle normal exchange requests gold reserves. And so, the amount of money outstanding was increased relative to the amount of actual gold the bank has on hand. As a result, during times of crisis,when the confidence of the financial system was low, Banks experienced a “run on the bank.”This was when a large amount of currency holders requested conversion into gold at the same time, especially if it was more gold than the bank had on hand.
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