An exchange house is an organization that provides a service, which consists of its clients exchanging currencies or currencies from different countries. Exchange houses are financial institutions dedicated to the purchase and sale of coins or currencies from various countries.
What is the service they provide?
These financial institutions are located in different places: banks, travel agencies, tourist places, international airports, bus/train stations, among other places with a high volume of passenger traffic. Your profit consists of two variables: the first consists of the exchange rate or quotation used to calculate the transactions. The second consists of an explicit commission for providing the service.
Exchange houses publish on a board or table (either in person or online) the transaction values, one for sale and one for purchase, in addition to mentioning the currency or currencies with which they work. Let’s see this example: if the price in a day is 1.50 dollars per pound, 1000 pounds would be 1500 dollars, under this indicator, an exchange house could sell dollars for a value of 1.40 in such a way that, for 1000 pounds, the customer gets $ 1,400; the difference generated is the profit or profit of the exchange house.
What are currencies?
The currencies are metallic coins, foreign banknotes, credit titles, bank deposits, any credit document in foreign currency or international means of payment. In other words, depending on the country we are in, the cash will be the currency of any foreign country; for example, if we are in Colombia, we can call the US dollar currency.
A little history
The origin of exchange houses dates back to the creation of money itself, which was born due to the need to give value to merchandise to facilitate international trade. However, the first exchange currencies were other materials, such as salt or individual grains, until finally, precious metals began to be used as exchange currencies.
However, these precious metals also created specific problems, since in many cases, their purity or weight made their value unclear. In an attempt to verify the importance of these precious metals as currency, they were marked by different methods (stamps, reliefs, inlays, etc.) to identify them and guarantee their quality.
Appearance of coins and bills
The creation of coins as forms of payment dates back to the 6th century BC. The first minting of cash took place in Lydia (present-day Turkey), and they were composed of an alloy of gold and silver. Almost simultaneously, other types of coins appeared in India and China. However, the notes would not arrive until a thousand years later, which would originate in China during the 7th century, although they would not be used officially until the 8th century.
As for Europe, its use was slow to implement, despite Marco Polo making mention of its use in the annotations of his travels in the 13th century. The real implementation of paper money in Europe took place in the mid-17th century in Sweden. However, the first use of the notes was not so much as real money but as a receipt that a quantity of gold (or other precious metal) had been deposited in the bank in Stockholm. These receipts or certificates were the ones that became the forerunners of the current exchange houses.
Operation of the first exchange houses
Many years ago, when a merchant ran out of product X that he was selling in his home country, and this product X had to be purchased in another foreign country (to replenish his inventory), the first thing that merchant thought was what currency will I need to purchase product X in another country? (which has its own coins, and local merchants know its weight, size, and characteristics).
The merchant had his own local currencies, which he could carry and exchange at the fair in another country, but he ran the risk of being robbed on the way, or perhaps he might have trouble exchanging his currencies during that period of time. Due to this, said merchant went to a “specialist” to solve the problem, said specialist had contacts in that other country (a person who owes him money in that country, for example), for which he prepared a document that would allow him to charge the merchant an amount in foreign local currency upon arrival in said country.
The detractors gradually accepted this model
The merchant bought (on credit) that “right to collection” from the specialist, both prepared a document, in which the holder of the right/record obliges the citizen of that other country (who owes him those foreign currencies), to deliver them to the carrier (local merchant) upon arrival at the fair in that country. The merchant bought product X from him with foreign currency, returned to his country of origin, sold product X from him with local currency, and canceled with local currency the man who gave him the right to collect in foreign currency. This was an exchange transaction “disguised” as a loan for which interest was charged. At that time, there were all kinds of forms of bills of exchange, and all of them were under suspicion by the complainants of moneylenders, who in some cases were accused of usury (charging of high interest) by certain radical local groups that had a different negative thought about these types of services.
With the exchange rate between the currencies, the specialist could “camouflage” the merchant’s collection of interest. At that time, there were certain detractors of usury and certain authorities who viewed this activity with suspicion but approved these exchange operations, knowing that there were many currencies in the world, which were not worth what the rulers said authoritatively, but that its value was determined by demand, in addition to the weight and content of the precious metals that the coin contained.
The detractors and authorities were aware that the currency, like the rest of the merchandise, varied in value, and therefore, there was a loss of profit. Thus it was correct to charge when the value of the currency changed. In the case of the example mentioned, the specialist provides a more useful service to the merchant, by having foreign currencies available in another country, without the risk of having to carry coins or wasting time looking for someone who can exchange them at a reasonable price or fair, therefore, when offering this service, the specialist had to charge more. This type of transaction can be considered legitimate if a common good has been promoted, such as bringing a product X to your country’s market, where there was no such product.
Over the years, the exchange houses were formalized, and different institutions, entities, and businesses began to emerge offering this type of service. Nowadays, many banks provide this type of service, although in most cases, it is given; Due to globalization, digitization, the increase in online banking operations, and Fintech companies’ emergence in digital form.
What do you think about this topic? Did you know the history of the exchange houses?
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