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History of Foreign Exchange
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by FX Universal
Ancient
Times
 Money
has been around in one form or another since the time of
Pharaohs. Middle Eastern moneychangers were the first currency
traders who exchanged coins from one culture to another.
However, during the middle ages, the need for another form of
currency besides coins emerged as the method of choice. The
Babylonians are credited with the first use of paper bills and
receipts. These paper bills represented transferable
third-party payments of funds, making foreign currency
exchange trading (also referred to as Forex or FX) much easier
for merchants and traders.
From the
infantile stages of foreign currency exchange during the
Middle Ages to WWI, the Forex markets were relatively stable
and without much speculative activity. After WWI, the Forex
markets became very volatile and speculative activity
increased tenfold.
From 1931
until 1973, the Forex market went through a series of changes
– many of which have paved the way for the road ahead. The
Forex market, as we know it today, originated in 1973.
A
Transitional Era
The
Bretton Woods Accord
The first
major transformation, the Bretton Woods Accord, took place
toward the end of World War II. The United States, Great
Britain and France met at the United Nations Monetary and
Financial Conference in Bretton Woods, New Hampshire to design
a new global economic order. The location was chosen because,
at the time, the U.S. was the only country unscathed by war;
most of the major European countries were in shambles.
The Bretton
Woods Accord was established to create a stable environment by
which global economies could restore themselves. The Bretton
Woods Accord established the pegging of currencies and the
International Monetary Fund (IMF) in hopes of stabilizing the
global economic situation.
Up until
WWII, Great Britain 's currency, the Great British Pound, was
the major currency by which most currencies were compared.
This changed when the Nazi campaign against Britain included a
major counterfeiting effort against its currency. In fact,
WWII vaulted the U.S. dollar from a failed currency after the
stock market crash of 1929 to a benchmark currency by which
most other international currencies were compared.
Now, major
currencies were pegged to the U.S. dollar. These currencies
were allowed to fluctuate by one percent on either side of the
set standard. When a currency's exchange rate would approach
the limit on either side of this standard, the respective
central bank would intervene to bring the exchange rate back
into the accepted range. At the same time, the US dollar was
pegged to gold at a price of $35 per ounce further bringing
stability to other currencies and the world Forex situation.
The Bretton
Woods Accord lasted until 1971. Ultimately, it failed, but did
accomplish what its charter set out to do, which was to
re-establish economic stability in Europe and Japan.
The
Beginning of the Free-Floating System
After the
Bretton Woods Accord came the Smithsonian Agreement in
December of 1971. This agreement was similar to the Bretton
Woods Accord, but allowed for a greater fluctuation band for
the currencies.
In 1972,
the European community tried to move away from its dependency
on the dollar. The European Joint Float was established by
West Germany, France, Italy, the Netherlands, Belgium and
Luxemburg. The agreement was similar to the Bretton Woods
Accord, but allowed a greater range of fluctuation in the
currency values.
Both
agreements made mistakes similar to the Bretton Woods Accord
and in 1973 collapsed. The collapse of the Smithsonian
agreement and the European Joint Float in 1973 signified the
official switch to the free-floating system. This occurred by
default, as there were no new agreements to take their place.
Governments were now free to peg their currencies, semi-peg or
allow them to freely float. In 1978, the free-floating system
was officially mandated.
In a final
effort to gain independence from the dollar, Europe created
the European Monetary System in July of 1978. Like all of the
previous agreements, it failed in 1993.
The Foreign
Exchange Market Today
The major
currencies today move independently from other currencies. The
currencies are traded by anyone who wishes. This has caused a
recent influx of speculation by banks, hedge funds, brokerage
houses and individuals. Central banks intervene on occasion to
move or attempt to move currencies to their desired levels.
The underlying factor that drives today's Forex markets,
however, is supply and demand. The free-floating system is
ideal for today's Forex markets. |
