Forex traders learn all the tutorials carefully to get to know the insider’s part and rules of Forex trading. But when it comes to Forex history, sometimes it is skipped as something not so important comparing to other topics and tutorials. But that’s completely wrong. History is the basic and the core of every discipline, and considering Forex trading as discipline, Forex history is the core of it too. Learning the foreign exchange history, trader can self-educate himself and get the required knowledge on the economical mechanism, that rule the Forex trading market and all the areas around it.
The following events will be explained in this tutorial:
- The Gold Standard
- The Bretton Woods System
- Fixed exchange rates
- The International Monetary Fund (IMF)
- Floating exchange rates
- Smithsonian agreement
Part I
Foreign exchange as the happening had appeared in the very early periods of human history. Tribes and people had to exchange some goods one for another. The value of each good was expressed in the quantity of other goods. Such currencies as stones, sticks, shells, teeth and so on soon became the criterion of other goods’ prices. But this money surely was insecure, so the people switched to the more reliable goods soon. But of course no talking of foreign exchange in its real way can be held on this stage of Forex trading history.
Foreign exchange in fact appeared with the appearance of so-called bills, or paper money that served instead of different currencies in the Middle Ages. But still the main historical events and economic happenings that led to the establishment of the Foreign Exchange Market as we know it today happened later, or exactly in XIX-XX centuries.
With the start of using of paper money, the advantages of this form of money over the metals became obvious. Still the value of the national paper currency was determined only due to the gold reserves of some certain country. The more gold was lying in the reserves of the particular country, the more power and value had its currency. The name of this system was The Gold Standard. The leading currency of that time was surely pound sterling, though it was the most gold-supported currency. So as the result, England became very authoritative country among the currency markets at that time.
Thankfully to the scientific and technological progress, by the end of the XIX century the world economy started developing really quickly, with the speed that world has never known before this. Because of these conditions, the people started to understand the way the world economic activity tends to work, and it was working in cycles, from prosperity to recession and again. Surely it was what affected currency exchange rates greatly. From that time national currencies could devaluate and revaluate in a boom-bust regime. Inflations could replace economic growth on the instant (which happened very frequently at that times in almost all European countries, and the US even faced the Great Depression), because it often turned out that the supply of paper money in a certain local country did not always correspond to the gold cover of this country, and nobody was responsible for that.
This ongoing volatility of the Golden Standard system and the lack of universal rules regulating currency relations were highly inconvenient for the most governments. However, then there was World War I, and that initiated the greatest changes ever in the world economy, and in the sphere of the currency market in particular. Here where’s the second part of Fx history comes.
In year 1944, the world economy was devastated and exhausted by the two wasting wars, that left a scar on the currency trading too. The trade flows had almost stopped and the free movement of gold was nearly impossible. To restore the international economic system, something had to be done immediately, without hesitation. Almost all the countries realized that the world has changed; the war experience emphasized the importance of joint efforts and cooperation for getting good results.
As the continue, 45 countries gathered on a conference in Bretton Woods, Great Britain in 1944, to set up a system of rules, institutions and procedures to regulate the international monetary system. The purpose of the conference in Bretton Woods was to prevent the reoccurrence of the dreadful events like the Great Depression of the 1930 and to secure the world economy, additionally helping it to recover from the postwar crisis.
The results of this conference played the great role in Forex trading history, and they came with the following facts:
- Finally setting up of a fixed exchange rate system, linking the US dollar at the rate of 35$ per ounce of gold, while all other currencies were defined in relation to dollar. Thus, the role of the world leading currency shifted from pound sterling to dollar, and the international economy became dollar-centered (which remains to be truth till the present day, actually). Most international transactions began to be denominated in USD.
- Beginning of Foreign exchange as we know today. It became possible due to fact that world currencies started to be pegged against one another.
- Establishing the International Monetary Fund (IMF), the main regulating monetary institution in the world. IMF was designed to be the keeper of the rules and the main instrument of public international management. Its role is also to be an advisor on monetary policies for the countries of the world and to finance trade deficits.
- Creating the International Bank for Reconstruction and Development (IBRD), now the most important agency of the World Bank Group. IBRD focused on promotion of world trade and financing the post war reconstruction of Europe. Now it is charged with making loans for economic development purposes.
But after some time, the Bretton Woods system started showing some disadvantages. The world economy finally started recovering, which seemed the certain plus and advantage of the system. The volume of international trades flashily increased, and this led to the massive movements of currency. The fixed foreign exchange rates which were set up according to this system, quickly destabilized and became senseless in the new conditions. So strange, but the positive economic trend was not positive at all and resulted in the negative financial effect.
An attempt to stabilize the situation within the framework of the Bretton Woods system was made in 1971. It was called the Smithsonian Agreement and was held under the U.S. leadership. According to the Smithsonian Agreement, the dollar was devalued to the rate of 38$ per ounce of gold in an attempt to balance the world financial system. However, the problem with all this was the fact that dollar was no longer suitable for the role of the sole international currency. Thus, the efforts to develop a new system of international monetary management failed.
Eventually it all ended with the Bretton Woods system collapsed in 1971, resulting with the fact that dollar was no longer convertible into different goods. This inevitably initiated the rise of the floating exchange rate.
But the significance of the Bretton Woods’ page of Fx history for the world economy can’t be underappreciated. The time of this system was the time when the entire world financial system was rethought and reinvented to achieve results. The whole economic psychology was changed. The Bretton Woods system was one of the important steps to the growing globalization.
After all, the world got the new page in the Foreign exchange history and the floating exchange rate system as the monetary system that’s existing since 1970s till the present day. After abandoning the system of fixed exchange rate, the market forces (like supply and demand) were left free to regulate exchange rates basing on their supposed values. Within this monetary framework, there is no single international currency, but there are more than ten currencies which are called most traded (still US dollar being on the first place). The modern Forex market is the result of implementing floating exchange rate system in the 1970s, and since and thankful to that time Forex has developed into the one of the largest global markets. Of course, many factors played the part in this. Primarily, this is the development of technology and heavy use of computers and the Internet. The capital started moving without any borders. The possibility to make trading and do transactions even from a home computer appeared (this was the opening of the electrical part of Forex history). More with this, trading on Forex is done 24 hours without a stop, since the important Forex trading centers are located in all time zones, from Asia through Europe to America. When one time-zone trading session ends, the session in another time-zone starts.
In floating exchange rate system the rate of exchange is determined by the supply anddemand of the currency in the market. For example, the higher is the demand for a certain currency, let’s say, US dollar, the higher its value will be. If the demand for the currency decreases, its price decreases, too. The floating exchange rate is changing continuously, which allows the participants of the Forex market to buy currency for the lower price at one period of time and sell it at much higher price at another, thus gaining profit.
However, there is the reverse side of this phenomenon – the traders can buy currency expecting to sell it at a higher price, though, some factors may influence the market, and the price for this currency will decrease despite the prior expectations, and they will lose the profit. In fact, Forex market appears to be very sensitive and susceptible to the influence of various factors, in particular political, economic and even psychological.
Still, there have been many changes in the world monetary systems since 1970s till present. The most significant is the introduction of Euro as the single European currency in 2001, and since then it has become one of the most popular and most traded currencies.
In concluding of this whole Forex trading history tutorial, the history of Forex does not embrace a very large period of time. In fact, it can be referred to two last centuries, while the period when the modern Forex started forming actively refers to the 1970s only. So that means that in fact Forex is a rather “young” phenomenon. Three important events in the history of Forex can be defined: the Gold Standard, the Bretton Woods system and floating exchange system. However, it should be remembered that since Forex is regulated by market forces, its state is changing constantly. Every day can bring the events that would change the face of existing economic system and make history. So, the history of Forex is being created every day and even every hour!
