History of the forex market from birth to date

The evolution of the forex market from the nineteenth century to date

Have you ever thought of how the forex market evolved the way it is today? If not, then you must be aware of such general topics to broaden your horizons and to look at the market with an entirely different viewpoint.

To understand this evolution, we will require to understand the international monetary system. An international monetary system is a collection of internationally accepted rules which states how relations of currency are organised within the global economy. It mainly comprises six parts. It includes:

1) The method of balancing international payments

2) International payment systems

3) The entire mechanism of gold markets and foreign exchange

4) Process of convertibility of currencies

5) The process for maintaining and establishing exchange rates

6) Duties and rights of intergovernmental institutions which regulate reactions of currency

Let's go back to the nineteenth century. We will see that there was no prescribed monetary system for the significant global economies (these include the Americas, India, Europe and China). Till this time, the six parts mentioned above have not come into existence. Officially the foundation of an international monetary system laid in the year 1867. The first conference of the international monetary system took place in Paris.

The entire mechanism of gold markets

Gold was the main entity in the international monetary system. The British Empire, the major economy at that time, set an exchange rate of the pound in terms of gold. The official agreed to sell or purchase an ounce of physical gold for about 4.247 pounds. The next country after this, which established the gold standard was the United States of America. In the United States, an ounce of gold was set equal to $20.67. Russia and West Europe followed it in the year 1897.

Pros of the gold standard

1) low inflation

2) Lace of rates volatility

Cons of the gold standard

1) There exists a tight correlation between the production of gold and the total volume of money. Shortage in the production of gold led to a money deficit, while new deposits of gold led to inflation.

2) Incapacity to have an individualistic national monetary policy

3) The entire gold system ended at the starting of World War 1. It was because the government chose to print more paper currency to finance its war expenditure and massive military expenses.

After the world war

The next period of the international monetary policy began in the year 1922 in Genoa. World war one ended, and the winners of this war got benefits for their national currencies.

In the new system, the gold and some significant currency which include the US, Britain and France converted into gold. National currencies became a medium of international reserves and payments. Thus, it helped them to overcome all the drawbacks of the gold system. During this time, the international monetary system slowly started depending on the economic health of the concerned countries.

The exchange of paper currency (including currency of Great Britain, France and the US) for gold was done directly or via foreign currencies.

Pros

1) Introduction to the national currencies lead to the removal of all the limitations of the gold standard. These were adopted as international payment-reserve tools.

2) It leads to the management and recovery of freely floating exchange rates

3) The regulations of the rate of exchange grew as the new element of the global financial system. It was held at international meetings and conferences.

Cons

1) The national economies started influencing the international monetary policy

2) This system resulted in the conditions of devaluations and currency war

The Great Depression between the year 1929 and 1933 led to the crash in the Genoa system. Its first impact was on the US dollar, and then this crisis spread in several other economies.

Bretton Woods System

Year passed by, and the subsequent significant step in the history of international monetary policy began in the year 1944 in Bretton Woods. The entire idea of Bretton Woods lied in the provision of dual paper money: by gold and dollar. Countries stated fixed their national currencies against the United States greenback. The greenback converted into the gold at a rate of $35 per ounce.

The United States dollar was the primary reference and reserve currency. All the participating economies had to hold their national currency rates to the greenback at the static level. The International Monetary Fund came into play and was established to control this system.

Pros

1) The rate of unemployment declined

2) At this time the world economy was expanding at a rapid pace

3) Inflation rate was low

Cons

The productivity of labour surged in Europe and Japan in comparison to that of the United States. Thus, the Japanese and European exports to the United States also increased. This led to the massive amount of greenbacks in Western Europe, and banking institutions started investing in these greenbacks in the US treasury securities. The external debt amount of the US rose.

Along with this, the European central banks urged to exchange their greenbacks for gold. Thus, the US gold reserves began declining. The official halt in the exchange of dollar to gold came in the year 1971.

The entire system stopped when the contents of gold declined, and the United States dollar was devalued twice (in the year 1971 and 1973).

Jamaican system

The fourth phase began in the year 1976 in Jamaica (Kingston). Countries got the chance to select any exchange rate rule they wish. The currency relations among various countries shifted towards floating exchange rates. Market forces such as supply and demand play a role in determining the exchange rates.

The currency rates volatility lies in two factors:

1) Demand and supply of national currency in the international market

2) Real value ratio. It reflects the purchasing power of national currencies at international markets.

Internet, technology and the growth of the forex market after 1990

With the advancement in technology and introduction to high-speed internet in the 1990s, it became possible for traders to invest in the forex market. The electronic communication networks also helped traders to pursue trading directly from home anytime.

The United States launched the ECN or the Electronic Communication Network in the year 1990 to aid electronic commerce. It became simple for traders to sign up and start trading with the financial service provider of their choice.

The forex market is expanding, with the arrival of currency trading instruments and online trading platforms. The accessibility on high-speed internet has also paved the way for remote traders. TradeATF is an excellent choice to trade with. It is a legitimate financial service provider regulated by the Cyprus Securities and Exchange Commission. The minimum deposit to start trading with the broker is $250, without any commission on trading.

The Bottom Line

From the details mentioned above, we can say that the forex market has a long history. It has passed through many iterations and has turned into what we see today. The four main periods in the history of the forex market include the Jamaican system, Bretton woods system, gold exchange standard and the gold standard. The development in technology has caused profound changes in the trading style and market price fluctuant.

Are you thinking of entering the forex market? If yes you can go with the demo trading account and educational courses of TradeATF. Demo trading accounts will enable you to practice trading before starting real trading. On the other hand, educational courses will help you to enhance the overall knowledge about the market and use of various analytical tools.