| Foreign Currency Exchange Information: History of the Forex |
History of the Foreign Currency Exchange Market
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FOREX Money Trader
History of the ForEx
There has been a lot of interest recently in trading on the ForEx market, for various
reasons, such as the leverage you can employ and the ability to trade at any hour of
the working week. It wasn’t always this way, and in fact this availability of the market
to ordinary traders is a very recent event. The story of how foreign currency
exchange has evolved is a fascinating one, and reveals how we got to the current
situation.
Of course, the history of the ForEx goes back many years, and is predated by the
very early trading days, when goods were exchanged between countries with no
money changing hands. In the early days, a common basis for exchange was tried,
using items such as stones or teeth to represent value, but soon precious metals
such as gold and silver became accepted to make payments, as well as provide a
convenient way of storing value.
Countries each developed their own form of currency, which started by minting coins
from a valuable metal, thus literally having something of value to pay for goods.
Within a country, money was developed by having paper IOUs, backed by the
government or by a bank, which could be exchanged for the value in precious metal.
In fact, well into the twentieth century governments guaranteed that you could
convert the paper currency into the equivalent amount of gold, and this required
substantial gold reserves to be held.
The first true means of currency exchange was developed from this idea, when in
1875 the gold standard was introduced, in which governments guaranteed the
conversion of a certain amount of currency into an exact amount of gold. By
extension, this established exchange rates between the currencies of different
nations.
However, there was ever increasing need for currency around the time of the First
World War, with the need to pay for the immense costs of war. It was found
impossible to keep up with this using a gold backed regime as there was not enough
gold available, and money had to be printed which had nothing other than a promise
of its value to back it. A natural consequence of this was inflation and monetary
recklessness by certain countries.
A major step forward was taken towards the end of the Second World War, when in a
meeting in New Hampshire the Allies reached agreement on a new standard of
international monetary system. The Bretton Woods system, named after where the
meeting took place, established the U.S. dollar as the primary reserve currency,
replacing gold as a standard for converting the world’s currencies – in fact the U.S.
dollar became the only currency to be backed by gold, at a rate of $35.00 per
ounce. The meeting also established the International Monetary Fund, and groups
that were precursors to the World Bank and the World Trade Organization.
Unfortunately, this monetary system was, in retrospect, doomed to failure, as the
United States found itself running an increasing balance of payment deficits in order
to try and maintain it. By the early nineteen seventies, the gold reserves were not
sufficient to cover the U.S. dollars held by foreign interests, and in 1971, President
Richard Nixon had to declare that the U.S. could not and would no longer convert
dollars into gold on demand. This effectively ended the Bretton Woods agreement,
and the fixed foreign exchange rates.
During the next few years various options were put forward, including the European
Joint Float proposed by six European countries in 1972, which shortly collapsed. The
Jamaica agreement a few years later formally recognized a free floating exchange
rate system, and abandoned any gold standard. While currencies were allowed in
theory to float freely in value against other countries’ currencies, this was not
universally applied, and other measures have been taken.
In Europe, the European Economic Community tried to fix exchange rates between
partners in 1979, calling this the European Monetary System. Pressures from
economies moving in different directions resulted in some devaluations being
needed in the early nineteen nineties, and the Maastricht treaty of 1991 resolved the
problem by proposing the replacement of individual currencies by the Euro in 2002,
which measure has proved successful, with the Euro looking to become stronger
than the dollar in international trade within the next few years.
On the other hand, some countries, for the sake of stability, adopted a dollarization
system, which takes the U.S. dollar as their national currency. For instance, this was
adopted by El Salvador. It is not without disadvantages, including that the country’s
central bank is unable to independently adopt any particular monetary policy, or
even to print money, but for a small economy it can prevent wild fluctuations in
foreign exchange.
Another system which China used between 1997 and 2005 is to peg, or fix, your
currency to another major currency. In this case, China pegged its Yuan to the U.S.
dollar, fixing the rate of exchange between them. The disadvantage to this system is
that you are still at the mercy of the major currency that you select, which may
depreciate or appreciate in a direction that you did not want.
Even when a currency is allowed to float apparently freely, the country’s central bank
may well try and influence the exchange rate by affecting supply and demand. For
instance, the central bank may raise short term interest rates if the currency is
depreciating, to encourage demand for the currency and investment in the country.
In an alternative approach to monetary control, the central bank may manipulate
interest rates for domestic reasons, such as to affect inflation, and this may result in
exchange rate changes.
So you can see that it was really only in the last decade or two that ForEx trading
has come into the form that we know it nowadays. This has also been facilitated by
the rapid growth of the Internet, which allows instant access from most locations with
the ForEx marketplace, and has enabled the individual to take his place alongside
the big banks in trading for a living.
There has been a lot of interest recently in trading on the ForEx market, for various
reasons, such as the leverage you can employ and the ability to trade at any hour of
the working week. It wasn’t always this way, and in fact this availability of the market
to ordinary traders is a very recent event. The story of how foreign currency
exchange has evolved is a fascinating one, and reveals how we got to the current
situation.
Of course, the history of the ForEx goes back many years, and is predated by the
very early trading days, when goods were exchanged between countries with no
money changing hands. In the early days, a common basis for exchange was tried,
using items such as stones or teeth to represent value, but soon precious metals
such as gold and silver became accepted to make payments, as well as provide a
convenient way of storing value.
Countries each developed their own form of currency, which started by minting coins
from a valuable metal, thus literally having something of value to pay for goods.
Within a country, money was developed by having paper IOUs, backed by the
government or by a bank, which could be exchanged for the value in precious metal.
In fact, well into the twentieth century governments guaranteed that you could
convert the paper currency into the equivalent amount of gold, and this required
substantial gold reserves to be held.
The first true means of currency exchange was developed from this idea, when in
1875 the gold standard was introduced, in which governments guaranteed the
conversion of a certain amount of currency into an exact amount of gold. By
extension, this established exchange rates between the currencies of different
nations.
However, there was ever increasing need for currency around the time of the First
World War, with the need to pay for the immense costs of war. It was found
impossible to keep up with this using a gold backed regime as there was not enough
gold available, and money had to be printed which had nothing other than a promise
of its value to back it. A natural consequence of this was inflation and monetary
recklessness by certain countries.
A major step forward was taken towards the end of the Second World War, when in a
meeting in New Hampshire the Allies reached agreement on a new standard of
international monetary system. The Bretton Woods system, named after where the
meeting took place, established the U.S. dollar as the primary reserve currency,
replacing gold as a standard for converting the world’s currencies – in fact the U.S.
dollar became the only currency to be backed by gold, at a rate of $35.00 per
ounce. The meeting also established the International Monetary Fund, and groups
that were precursors to the World Bank and the World Trade Organization.
Unfortunately, this monetary system was, in retrospect, doomed to failure, as the
United States found itself running an increasing balance of payment deficits in order
to try and maintain it. By the early nineteen seventies, the gold reserves were not
sufficient to cover the U.S. dollars held by foreign interests, and in 1971, President
Richard Nixon had to declare that the U.S. could not and would no longer convert
dollars into gold on demand. This effectively ended the Bretton Woods agreement,
and the fixed foreign exchange rates.
During the next few years various options were put forward, including the European
Joint Float proposed by six European countries in 1972, which shortly collapsed. The
Jamaica agreement a few years later formally recognized a free floating exchange
rate system, and abandoned any gold standard. While currencies were allowed in
theory to float freely in value against other countries’ currencies, this was not
universally applied, and other measures have been taken.
In Europe, the European Economic Community tried to fix exchange rates between
partners in 1979, calling this the European Monetary System. Pressures from
economies moving in different directions resulted in some devaluations being
needed in the early nineteen nineties, and the Maastricht treaty of 1991 resolved the
problem by proposing the replacement of individual currencies by the Euro in 2002,
which measure has proved successful, with the Euro looking to become stronger
than the dollar in international trade within the next few years.
On the other hand, some countries, for the sake of stability, adopted a dollarization
system, which takes the U.S. dollar as their national currency. For instance, this was
adopted by El Salvador. It is not without disadvantages, including that the country’s
central bank is unable to independently adopt any particular monetary policy, or
even to print money, but for a small economy it can prevent wild fluctuations in
foreign exchange.
Another system which China used between 1997 and 2005 is to peg, or fix, your
currency to another major currency. In this case, China pegged its Yuan to the U.S.
dollar, fixing the rate of exchange between them. The disadvantage to this system is
that you are still at the mercy of the major currency that you select, which may
depreciate or appreciate in a direction that you did not want.
Even when a currency is allowed to float apparently freely, the country’s central bank
may well try and influence the exchange rate by affecting supply and demand. For
instance, the central bank may raise short term interest rates if the currency is
depreciating, to encourage demand for the currency and investment in the country.
In an alternative approach to monetary control, the central bank may manipulate
interest rates for domestic reasons, such as to affect inflation, and this may result in
exchange rate changes.
So you can see that it was really only in the last decade or two that ForEx trading
has come into the form that we know it nowadays. This has also been facilitated by
the rapid growth of the Internet, which allows instant access from most locations with
the ForEx marketplace, and has enabled the individual to take his place alongside
the big banks in trading for a living.
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Working with this program
now. Seems to work well.
Have made back my
investment in the program
so I figure its paid for itself.
Give it a shot!
now. Seems to work well.
Have made back my
investment in the program
so I figure its paid for itself.
Give it a shot!
