Learning FOREX history won’t make you trade better or more effectively. But, covering the major event changes that have brought us to FOREX currency trading today will give you, a a FOREX beginner, an appreciation of how everything works together. And, if you’re a history buff, it’s bonus info! While we could go back even further into the very early days of foreign exchange history, over the past 80 years, there have been several notable events that have marked key evolutionary growth stages in FOREX history and the currency exchange markets’ development. Over this time period, there were 3 watershed moments. These key events are what this article will focus on: - Development of the Gold Standard FOREX History – The Gold Standard System
By various accounts, the Gold Standard started coming into use in the United States around 1815, the furthest point we're travelling back to in our FOREX history tour, part of our 3-part FOREX trading for beginners overview.
This standard was a measure devised for trading commodities, where gold was used as a fixed value against which to measure a commodities value. Prior the establishment of the Gold Standard, gold and silver were often used as payment for commodities, not only in the US, but elsewhere in the world. However, in this early chapter of FOREX history, one of the gold standards’ main weaknesses was that its value was prone to the swings of supply and demand of these precious metals. A short supply of gold caused gold’s value to increase, and a excess supply (as in a new gold strike with more gold coming on the market, caused its value to decline. Foreign Exchange history took a leap forward when the gold standard monetary system was created in 1875, and the standard was officially adopted by the US in 1879. The driving force behind this development was that the U.S. currency would be backed by gold. This in turn, would allow our government and others operating under the gold standard, to guarantee converting their gold into a specific amount of their native currency, or converting that currency back into an equal amount of gold. The gold standard led to foreign exchange history, with the world developing the first standardized way of managing currency exchange. First, economically developed country's determined how much their currency was equal to an ounce of gold. And second, differences between the price of an ounce of gold between two countries currencies, (due to slight differences in how one country calculated the value of their currency to an ounce of gold versus another:…this second difference evolved into the exchange rate between one country's currency and another. In FOREX history retrospect, the gold standard system worked fine - - - as long as there was enough gold ‘in reserve’ to back the amount of currency in the market. However, World War II changed foreign exchange history, due to several countries massive expenditures to fund the war effort that effectively bankrupted them. Plus, the huge drain it caused on their respective gold reserves. Bottom line, the gold reserves in England and other European countries weren’t sufficient to back or exchange for the huge amount paper currency those governments were printing to finance their respective war costs. A new system was needed. And a new chapter in the history of FOREX was born. FOREX History – Bretton Woods System
The Bretton Woods System of International Monetary Management came into being in 1944, named after the location (Bretton Woods, NH) where the major conference took place.
Two of the main changes in this agreement were (1) replacing the gold standard with the US Dollar as the primary ‘reserve’ vehicle and (2) establishing fixed currency exchange rates. This agreement was driven in part by the US being worlds' main economic powerhouse and not suffering the debilitating economic stresses that plagued war weary European countries. Also in the Bretton Woods agreement going forward, the US Dollar was the only global currency backed by gold, and became the default global reserve currency, just like gold had been under the gold standard. Over the next 25 years, these factors proved to be Bretton Woods’ Achilles heel and downfall, marking another watershed change in FOREX history. The end result of 25 years of U.S. financing and helping rebuild these war-torn countries economies and backing the worlds' currencies with the Dollar and its gold reserves, was that foreign banks held so much in reserve of US Dollars by 1970 that the Treasury no longer had enough gold reserves to cover those foreign held US Dollars. The end of Bretton Woods came in the early 1970’s in an announcement from then U.S. President Richard Nixon. The US would no longer exchange its gold for foreign country’s reserves of US Dollars. The gold standard was dead. FOREX Exchange History – Floating Exchange Rates
In 1976, the Jamaica Agreement effectively abolished the gold standard, with floating currency exchange rates being adopted by the world community.
Floating exchange rates continue in use in FOREX trading to the present day and helped to extend the growth in FOREX trading by
foreign exchange market participants. Certain countries may employ a managed floating currency rate system, which gives the government of a country the ability to intercede to stabilize their currency in the event of extreme exchange rate movements. Free floating currency exchange rates are employed by countries with major global currencies like the US Dollar and others. These are the FOREX currencies most people are familiar when it comes to foreign currency exchange trading. "Free floating" simply means that a currencies value is allowed to float or fluctuate based on the market, operating under classic supply and demand factors. Currency values are independent of other foreign currencies. Some smaller countries may use either of the other two exchange rate systems, more for the benefits of currency stability of having their currency associated with a major global currency, and what that may mean for their country. With Dollarization, a country chooses to “adopt” another country’s currency as its own, opting not to use their native currency. Dollarization has a major downside, as the country cannot make any monetary policy, or print any more of its own money, Pegged rates occur for the reason of stability too. With this type of currency exchange rate system, a country ‘pegs’ its currency to another, more stable foreign currency. The country gains the benefits of its currency rate only moving when the more stable pegged currency moves….and the ability to exchange its’ own currency for a fixed rate. Who knows what changes to FOREX currency floating exchange rates may await us in the future? But for now, this ends our discussion of FOREX history. Click this link to return to the page top of
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