Before we delve into the origins of Foreign Exchange (Forex), let us quickly revisit the concept behind the exchange of goods in those days. In the absence of a central medium of exchange, our ancestors will express the value of goods in the terms of other goods. This is referred to as the Barter System or Trade by Barter.
The clear limitations of the Barter System encouraged our forefathers towards establishing a common base of value of exchange. Goods like salt and spices become popular mediums of exchange. In some economies, items like feathers, teeth and even stones were recognized as such. Eventually, as man neared the metal age, during the sixth century BC, metals such as gold and silver were minted into coins and became the generally accepted tool of transaction.
Over time, it became very inconvenient for traders because of its weight. In the 1800, countries adopted the gold standard where governments would redeem any amount of paper money for its equivalent in gold.
However, during World War 1, European Countries had to suspend it because they had printed more money to pay for the war. However countries moved on with the gold standard because they could convert the currencies they received into gold.
The Bretton Woods System
In 1944, the first major development in the Foreign Exchange Market occurred; The Bretton Woods System. This took place towards the end of WWII. The United States, France and Great Britain met at the United Nations Monetary and Financial Conference in Bretton Woods, NH on creating a global economic order.
The Bretton Woods Accords was designed to ensure stability so that global economies could restore themselves. It desired to achieve this by establishing an adjustable pegged foreign exchange market where foreign currencies will fix their exchange rate to another currency, and in this case, the US dollar. The USD was being pegged to gold at the moment because they held the most gold reserves then and they were unaffected by the war. This explains how the US Dollar became the world’s reserve currency.
However, with time, the agreement failed to peg gold to the USD because the gold available was not enough to equate the amount of US dollars in circulation which saw an increase due to increased government spending and lending. In 1971, President Richard Nixon ended the Bretton Woods System and this led to the new system.
The Free-Floating System
The end goal was to establish a free floating exchange rate which is a flexible exchange rate system where the sole determinants are the market forces of demand and supply of foreign and domestic currency, and government intervention is totally inexistent.
After the scrapping of the Bretton Woods System, the US government established a new agreement, the Smithsonian Agreement in December 1971. It has some similarities with the Bretton Woods Accords but it had room for a greater fluctuation band for other currencies. Then, the United States pegged the dollar to gold at $38/ounce depreciating the dollar.
In 1972, the European community established the European Joint Float comprising of West Germany, France, Italy, the Netherlands, Belgium and Luxembourg. However, both systems fell victim to the same mistakes as the Bretton Woods System and collapsed in 1973. This ultimately led to the official move to the free-floating system.
The Plaza Accord
Another notable event that occurred on the journey towards the free-floating system was the Plaza Accords. In the 1980s, the US dollar greatly appreciated against the currencies of other countries and its effects were felt by third world countries as well as some American factories because they couldn’t compete with foreign competitors.
In 1985, West Germany, US, France, Great Britain and Japan, the most powerful economies in the world – the G-5 sent representatives to a supposed secret meeting at the Plaza Hotel in New York. News of the meeting leaked causing the G-5 to issue a statement encouraging the appreciation of non-dollar currencies. This became known as the Plaza Accords and it caused a fall in the dollar.
This allowed trading parties to realize how profit could be made in this new world of currency trading. Although, the government intervened, but it still didn’t stop the fluctuations and the presence of fluctuations makes room for profit.
Creation of the Euro Currency
Just after WWII, Europe forged many treaties designed to bring countries of the region closer together. None were more prolific than the 1992 treaty referred to as the Maastricht Treaty, named for the Dutch city where the conference was held.
The Maastricht treaty which was named after the Dutch city where the conference was held in 1992, became the most prolific treaty among the many Europe formed at the time with the sole purpose of bringing together the countries of the region.
The Maastricht Treaty which is the foundation of the European Union (EU), in turn led to the creation of the Euro currency and led to the establishment of a union that included initiatives on security and foreign policy. With several amendments made to it over time, the formation of the Euro gave European banks and businesses the benefit of removing the risk of exchange in a continuous globalized economy.
The Present and Future with FOREX
With constant developments in the world; the introduction of the internet and the computer, Forex continues to evolve becoming more sophisticated and faster than ever. From the days of the gold standard, we have now reached a new age where someone sitting at home with just the click of a button can find a price that would have involved a lot of manpower.
Now there’s been improvements in the Forex market as currencies that were previously excluded from the totalitarian political systems can now be traded.
Presently, Forex is the world’s largest market with a trade volume of over$5 trillion daily. The future of the market remains uncertain but with its dynamism and ever expanding network, opportunities will always be available for FX traders.
Conclusively, to trade successfully in the FOREX Market, you need to stay up to date with the happenings of the market and also, other variables relating to it. Stay connected with us at FXcryptonews for recent updates, news and events.