You are here: Home > Forex > A Quick History of FX Market

A Quick History of FX Market

Foreign exchange market which is commonly referred to as FX or Forex is a decentralized global market on which currencies are traded. In this market, currencies are bought and sold at current or determined prices. Forex is the largest market in the world in terms of volume. While trading on the Spotoption platform, it is good to know the history of the robust FX market.

When did Forex start?

In ancient years, there were people helping to exchange currencies for a fee. There is evidence that exchange of coinage was practised in ancient Egypt. In the 4th century, during the Byzantine era, currency exchange was a monopoly of the government. Currency trading continued to be an active but not a mainstream industry in many countries across the world. In 1704 for example, currency agents helped transact business between the county of Holland and England.

Modern Forex trading

In the early 1800s, countries were using gold and silver as a method of international payment. The use of gold and silver was not a very safe way to pay because the value of such metals got affected a lot by global demand and supply. If gold was discovered in a certain country, supply would shoot up and this meant the value of gold would drastically go down. This continued until the creation of the ‘gold standard’ in 1875.

 

What does gold standard mean?

Upon the creation of the gold standard system, governments agreed to convert currencies into a specific amount of gold. They also agreed on the conversion of gold into a specific amount of currencies. This meant that currencies were backed by gold. For every franc, dollar or pound out there, it was backed by gold of an equal value. This obviously meant that governments were required to have enormous gold reserves. In the late 19th century, almost every other government in the world had pegged its currency to gold. As the years went by, an ounce of gold would be priced differently in different countries. The difference in price between an ounce of gold between two different currencies became the exchange rate for such currencies.

Breaking down of gold standard

During the World War 1, European countries felt a need to print more money so as to finance the many military projects they had undertaken. The printing of more money was further accelerated by the animosity between the major global economies such as Germany and England. Within no time, the amount of money in circulation was much more than the available gold reserves in the respective countries. By the time WWII was starting, almost every other country had abandoned the gold standard. Even though the gold standard was abandoned, gold continued to be used as a measure of monetary value.

Bretton Woods

After the collapse of the gold standard system, members of the allied nations met in Bretton Woods in 1944. They met to deliberate on a new monetary system which would later be referred to as the Bretton Woods System or the International Monetary System. Among the things Bretton meeting sought to establish were:

  •         To use the U.S dollar as a reserve currency thereby replacing gold
  •         The creation of international monetary agencies such as the IMF and GATT
  •         A method of fixed exchange rates

The Bretton Woods system failed because it sought to make the U.S dollar as the only currency to be backed by gold. By 1970, it was no longer possible to back the U.S dollar with gold.

Modern-day FX market

The ineffectiveness of the Bretton Woods and the European Joint Float eventually led to a situation where no one had control of the currency market. Between 1972 and 1973 the currency market experienced several challenges that led to the European Forex markets closing for two weeks. This marked the end of the state-controlled currency markets. In 1973 individuals started trading currencies. People started trading currency pairs. Within a few years, more currencies were introduced for trading.

In conclusion

United Kingdom accounts for more than 40% of the total Forex trading. It is the single most important centre for foreign exchange trading in the world. Today, FX markets across the world are the most liquid. The main players in these markets are governments, commercial banks, central banks, currency speculators, corporations and financial institutions.

Tags:

Leave a Reply

You must be logged in to post a comment.