The History of Forex Trading
Many centuries ago, the value of goods were expressed in terms of other
goods. This sort of economics was based on the barter system between
individuals. The obvious limitations of such a system encouraged
establishing more generally accepted mediums of exchange. It was
important that a common base of value could be established. In some
economies, items such as teeth, feathers even stones served this
purpose, but soon various metals, in particular gold and silver,
established themselves as an accepted means of payment as well as a
reliable storage of value.
Coins were initially minted from the
preferred metal and in stable political regimes, the introduction of a
paper form of governmental I.O.U. during the Middle Ages also gained
acceptance. This type of I.O.U. was introduced more successfully
through force than through persuasion and is now the basis of today’s
modern currencies.
Before the first World war, most Central
banks supported their currencies with convertibility to gold. Paper
money could always be exchanged for gold. However, for this type of
gold exchange, there was not necessarily a Centrals bank need for full
coverage of the government's currency reserves. This did not occur very
often, however when a group mindset fostered this disastrous notion of
converting back to gold in mass, panic resulted in so-called "Run on
banks " The combination of a greater supply of paper money without the
gold to cover led to devastating inflation and resulting political
instability.
In order to protect local national interests,
increased foreign exchange controls were introduced to prevent market
forces from punishing monetary irresponsibility.
Near the end of
WWII, The Bretton Woods agreement was reached on the initiative of the
USA in July 1944. The conference held in Bretton Woods, New Hampshire
rejected John Maynard Keynes suggestion for a new world reserve
currency in favor of a system built on the US Dollar. International
institutions such as the IMF, The World Bank and GATT were created in
the same period as the emerging victors of WWII searched for a way to
avoid the destabilizing monetary crises leading to the war. The Bretton
Woods agreement resulted in a system of fixed exchange rates that
reinstated The Gold Standard partly, fixing the USD at $35.00 per ounce
of Gold and fixing the other main currencies to the dollar, initially
intended to be on a permanent basis.
The Bretton Woods system
came under increasing pressure as national economies moved in different
directions during the 1960’s. A number of realignments held the system
alive for a long time but eventually Bretton Woods collapsed in the
early 1970’s following president Nixon's suspension of the gold
convertibility in August 1971. The dollar was not any longer suited as
the sole international currency at a time when it was under severe
pressure from increasing US budget and trade deficits.
The last
few decades have seen foreign exchange trading develop into the worlds
largest global market. Restrictions on capital flows have been removed
in most countries, leaving the market forces free to adjust foreign
exchange rates according to their perceived values.
In Europe,
the idea of fixed exchange rates had by no means died. The European
Economic Community introduced a new system of fixed exchange rates in
1979, the European Monetary System. This attempt to fix exchange rates
met with near extinction in 1992-93, when built-up economic pressures
forced devaluations of a number of weak European currencies. The quest
continued in Europe for currency stability with the 1991 signing of The
Maastricht treaty. This was to not only fix exchange rates but also
actually replace many of them with the Euro in 2002.
Today,
Europe has embraced the Euro in 12 participating countries. The
physical introduction of the Euro on January 1, 2002 saw the old
countries currencies made obsolete on July 1, 2002.
In Asia, the
lack of sustainability of fixed foreign exchange rates has gained new
relevance with the events in South East Asia in the latter part of
1997, where currency after currency was devalued against the US dollar,
leaving other fixed exchange rates in particular in South America also
looking very vulnerable.
While commercial companies have had to
face a much more volatile currency environment in recent years,
investors and financial institutions have discovered a new playground.
The size of the FOREX market now dwarfs any other investment market.
It
is estimated that more than USD 1,200 Billion are traded every day,
that is the same amount as almost 40 times the daily USD volume on the
American NASDAQ market.
