In order to properly understand the operation and scope of the Forex currency market, it is necessary to know something of its origins and the reasons that led to its existence and to the assets with which it trades, that is, currencies.
The currency exchange market became accessible, continuous, and global to all investors, becoming the largest market by volume of capital involved daily. And this global currency trading market is what is known as FOREX (Foreign Exchange Currencies Market), but do you know its history? Below is a brief explanation of what the forex market has been since its inception.
The history of the Forex market began in the Middle Age when currency trading was done through international banks. In this way, Europeans spread currency trading throughout Europe and the Middle East.
In 1875 the most important event in the history of currency trading took place: the creation of the monetary system of the gold standard. Until then, the different countries used gold and silver as an international payment method.
However, the monetary system of the gold standard fell during the First World War.
We go back to the year 1944. In this year, the Bretton-Woods agreement was carried out, whose objective was to vote for the nations of a monetary currency that avoided the flight of capital between countries and monetary speculation.
The Bretton Woods Agreement has played a fundamental role in the history of currency trading.
Previously, the value of the coins was established according to the gold reserves of each country. This was a very unstable system because it caused exaggeratedly excessive growth and recession cycles.
The Bretton Woods Agreement offered changes according to exchange rates. In 1947, as the IMF went into operation, the US Dollar served as a measure of the price of gold, set at $35 an ounce.
When a nation develops, it buys goods importing them, and therefore, it loses part of its gold reserves, sustenance of the currencies with which it is paid. It is reduced to the monetary mass and the price of money rose (interest rates), causing a decrease in economic activity and reaching recession.
When domestic demand for products falls, they lowered their price, returning to be internationally competitive, and being exported to other countries. It was then entering into a pattern of accelerated business growth, with which the money supply and therefore the gold reserves grew again.
It was necessary to find a system that banished these economic models with cycles of growth and recession so abrupt and brief. In short, it is about achieving greater monetary profitability that allows an alternative of economic growth and a smoothing of the cycles of growth and decrease.
This is how it happened to be the new currency of the international reserve.
The creation of the International Monetary Fund and the World Bank was established under the Bretton Woods Agreement. The objective of the agreement was to establish international monetary stability avoiding the free exchange of money between the different countries.
Governments committed to keeping their currencies in a narrow margin of variation concerning the Dollar. Also, Central Banks of each country were prohibited from arbitrarily devaluing their currency to achieve price competitiveness and increase exports (the maximum tolerable devaluation would be 10%).
But these conditions were not fulfilled, since in the decade of the 50, the enormous activity of reconstruction after the Second World War and the necessity of goods and services of a population with notable deficiencies caused that there was an enormous flow of capital to an international level that destabilized the exchange rates agreed in Bretton-Woods.
In 1971, the Bretton Woods Agreement broke down, emerging the current currency exchange system (you could not stand the change $35 an ounce of gold).
The currencies then began to fluctuate freely, based on the laws of supply and demand, calculating the exchange rates daily. That increased the volume of capital in circulation as well as the speed and volatility of the currency exchange operations.
Starting in the 1980s, the introduction of new technologies began to favor the globalization of the currency exchange market, and its interruption, as the Asian market in America and Europe passed through time uses continuously, which caused a 24-hour open market.
With the technologies of the 90s and the appearance and extension of the Internet all over the world in the new century, the foreign exchange market became global, continuous and accessible for all investors.
It became the largest market by volume of capitals involved daily. And this global market for buying and selling currencies is what is known as FOREX (Foreign Exchange Currencies Market), or international currency exchange market.
This is where the history of the FOREX market begins, as it is known today. Currency trading has increased exponentially, going from 70,000 million Dollars a day in the 1980s to one and a half billion Dollars a day just twenty years later.
References:
- https://www.investopedia.com/terms/b/brettonwoodsagreement.asp
- https://www.imf.org/external/about/histend.htm
