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Home / Beginners / What is Forex Trading? / Forex History
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Forex History

Money has always been the denominator of value, since it is the material of money that has always been valued: sable furs, gold, silver, etc. So, it was known, for instance, that a French franc contains a certain quantity of gold, while a British pound had another amount of gold.

However, the increasing number of goods being sold made it impossible to produce the required amount of money from gold and other precious materials. Therefore, they began to produce money out of cheaper and more accessible materials, and that created the problem of determining the ratio of one currency to another.

In order to resolve the situation, the first system of international rules governing foreign exchange operations was adopted and called the Gold Standard. This system was introduced between 1803-1825, after the Napoleonic wars. The idea of the Gold Standard was that the participants countries stated on their currencies the gold content, and guaranteed the exchange of their money for gold in accordance with the specified amount, should any other participant country require to do this. The Gold Standard  existed until the First World War and endured several crises, as not all countries could provide a consistent exchange of their currencies for gold.

During the Second World War, there was no solid system for regulating online forex exchange rates. However, within this period, the first international financial companies appeared. In 1930, in Basel (Switzerland) the Bank for International Settlements was established  to support young independent countries, which had a deficient balance of payments.

The next stage of global financial order was the introduction of the Bretton Woods agreements, which had a significant impact on the economic and banking sector of the member countries. Let us have a closer look at it.

In 1944, the US hosted the Bretton Woods Conference, which marked the end of US-British rivalry. The conference was attended by two prominent personalities: Harry Dexter White (US) and John Maynard Keynes (UK). They had developed and adopted a new system of global finances development.

The main provisions of the Bretton Woods System:

  • Two currencies were assigned to serve as an international reserve -- the UK pound sterling and the US dollar.
  • IMF (The International Monetary Fund) was created to become the most important body that controls international financial and economic relations. Originally, the fund was issuing stabilization credits to countries that complied with IMF regulations.
  • Parities of currencies were established and bound to the US dollar. Admissible variation was 1%. The dollar, in turn, was bound to an ounce of gold.
  • IMF members made deposits in gold and currencies.
  • Member of the IMF could change the parities only after agreement with the IMF.
  • By the end of the transition period, all currencies would have been convertible, so all countries must have international reserves and make intervention in currency markets, if necessary.

In 1947 the programme for the rehabilitation of the European economy was introduced. The US Secretary of State, Marshall, in his report described the plan under which the European economy would reach a high level of development and would be capable of sustaining military power. The main objective of this programme was to prevent the development of Communism and to close the dollar gap. While in 1949 foreign currency liabilities of the US before Europe accounted for 3.1 billion dollars,10 years later, this figure reached 10.1 billion.

In 1964, Japan declared its currency as convertible, after which it became clear that the US could no longer maintain the price of gold ounce, and this presented a threat to the US. The President Kennedy Administration had made some mistakes, including the introduction of the programme of voluntary reduction of foreign loans share, and the tax on interest rate differentials, which led to higher costs for foreign borrowers and caused the formation of the Eurodollar market.

In 1967, the devaluation of the British pound delivered the last blow to the Bretton Woods system, which resulted in the balance of payments deficit of the US, causing the decrease of gold reserves from 18 to 11 billion dollars and an increase in foreign debt.

In 1970, America had a serious dollar crisis as a result of lower interest rates on deposits, causing an outflow of investment from US to European banks, where interest rates were higher.

In May, 1971, the Netherlands and Germany declared their currencies free floating. In August of the same year, the American president Nixon was forced to temporarily halt the dollar’s convertibility into gold. At the end of 1971, at the Washington Smithsonian Institution a desperate attempt was made to save the Bretton Woods system by increasing the range of admissible variation of exchange rates to 4.5%.  At that time it was huge money, but it did not save the situation. European and Japanese exchanges had closed, and the US government reported a 10 per cent devaluation of the dollar. The currencies of developed countries have ceased to adhere to fixed parities and began to float freely.

In 1973-1974, the programme of voluntary reduction of foreign loans share was discontinued and the tax on interest rate differentials was abolished. The Bretton Woods system ceased to exist. Before it collapsed, currency traders had received huge profits from trading transactions. This was observed during the termination of investments by central banks. However, after the fixed exchange rates had been cancelled, traders were considerably limited in opportunities. Most banks have suffered huge losses, and the two largest  - “Franklyn National” and “Bunkhouse Hershtadt” - went bankrupt as a result of unsuccessful trading.

In 1976, at Jamaica Conference in Kingston, the world countries’ leaders adopted new rules for the World Monetary System, according to which gold was no longer used as a means to cover the currency shortages in global payments. Now, the settlement of monetary relations and currencies convertibility were delegated to international organizations. National currencies were used as payment elements. Foreign currency transactions were carried out through commercial banking organizations. It was in 1976, when a new currency trading system of controlled floating exchange rates came into effect.