The History of the Forex

To understand the global nature of the Forex exchange market and to understand how it works one should know about the important historical events that lead to its evolution. In this article we will know about the international monetary system and how it has evolved to its current state. We will also try to know about the major Forex market participants.

The History of the Forex
Gold Standard System and Bretton Woods system

The creation of the gold standard in 1875 is one of the most important events to take place in the Forex history. Before the creation of gold standard, most countries would routinely use gold and silver as means of international fee. The main problem with utilizing gold and silver for fee was that it was very much influenced by external supply and demand. For that reason, say if a new gold mine was discovered, the gold prices would go down.

The governments backed their currencies with a substantial amount gold reserve. By the late 19^th century, the major countries had defined a certain amount of currency for an ounce of gold. Over the next few years, the price difference between ounces of gold in different currency became the exchange rate for the respective currencies and hence a standardized system of currency exchange evolved. But the World War I tested the viability of the Gold Standard. With most European countries preparing for military preparation, there was no enough gold to back the excess currency that the government had to print. By the end of World War II, most countries had abandoned the gold standard. But, the shine of gold never diminished.

After the fall of the gold standard system, the allied nations, felt the need to create a unified monetary system that would fill the void of the gold standard system. That is when; the Bretton Woods System was formed. In the year 1944, during the month of July, the allied nations met at Bretton Woods to discuss and create the Bretton Woods system of international monetary management. The Bretton Woods system eventually failed but, it gave us the top most international monetary agencies that oversee economic activity namely the International Monetary Fund (IMF), International Bank for Reconstruction and Development, and the General Agreement on Tariffs and Trade (GATT). The reason this system failed was that since this system, US dollar became the only currency to be backed by gold and by early 1970s the US treasury were depleted and didn’t have sufficient funds to cover the US dollars in foreign central banks.

Hence, eventually on August 15^th 1971, the US President decided to abandon the system and that marked the demise of Bretton Woods.

Current Exchange rates

In 1976, in the Jamaica agreement, the world finally accepted the use of floating foreign exchange rates. According to this agreement, most governments adopted any of the following exchange rate systems. Let’s know a little more about them.

1.         Dollarization:         In this system, a country doesn’t print its own country currency; rather they adopt a foreign currency as its national currency. For e.g. El Salvador uses the US dollar as its national currency. The bright side of this system is that the country is seen as a stable economy.

2.         Pegged rate:          In this system a country fixes its exchange rate to a foreign currency.  While this system provides more stability than a normal float, however, it increases the dependence on the pegged currencies

3.         Managed floating rate:    In this type of system, a country decides its currency to change value as per the market forces. It depends on the supply and demand scenario. However, the government may choose to intervene in case the fluctuations are extreme.

Hope this article helped you to have a better understanding history of the evolution of Forex markets.