How Does Forex Come to Life

| March 24, 2015 | 0 Comments

Forex (short for Foreign Exchange) means trading of currencies between countries. It is decentralised and world’s largest market for currency trading. For more information, you can visit here.

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History

Trading or simply the exchange of goods dates back to centuries in Babylonia. Popularly called Barter system, exchange of goods took place then putting a value to goods to be exchanged. Interestingly, some currencies and paper notes existed and Babylonians are known to have exchanged paper notes and receipts, though there were no speculations.

Barter system had its own limitations. It necessitated that there should be a standard method of value in exchange of goods. Stones, feathers, and teeth and later metals formed a common base of value. Gold and silver were considered favorably. Trade between Asia and Africa took place with the use of above metals as exchange medium.

Big Steps

Today’s paper currency has its roots in the Middle Ages. It started as an I.O.U and was introduced by force to gain larger acceptance by the public. This was possible as the initiation took place from stable governments. Coins continued to be minted.

The See-saw and Bank Run

Prior to the First World War, there was a boom in the economy and a great deal of import. This led to gold being used heavily and money supply coming down in turn causing recession, inflation, and price rise. Economic activity decreased, interest rates peaked. Hence the erratic imports in a healthy economy led to a steep economic downturn.

Central Banks’ role was to support the currency by easy conversion to gold.  The country was witnessing the see-saw effect of the exchange value of gold that was evident with the rise and fall of the economy. These people realized that converting back to gold in large proportions was a herculean task.

This period saw the Bank Run and with withdrawals from everywhere, leading to political instability and inflation. There was demand for paper money and not gold.

It was an ideal setup for other countries to buy. Trade commenced, interest rates came down, gold and money supply restored the economy.

Recessions

The terrible inflation and deep recession led one thing to another. Series of things happened such as :

  • Year 1931: Removal of gold standards during The Great Depression
  • Years 1931 – 1973 : Changes in forex scenario. There were strict controls on forex to bring in economic stability

The decades between 1931 and 1973 was turbulent, which is mentioned below.

During the End of World War II

IMF, GATT, World Bank were created. USA initiated the Bretton Woods agreement in July 1944. In favor for US Dollars, New Hampshire rejected John Maynard Keynes’ suggestion for introducing new world currency in a conference at Bretton Woods.

The Bretton Woods agreement fixed the exchange rate of 1 US Dollar to 35 for 1 ounce of gold. The other main currencies were also fixed to a US Dollar.

Emergence of European Monetary System

The European Monetary System was established in 1979 by the European Economic Community, after the collapse of Bretton Woods in 1971 when President Nixon suspended gold convertibility, following difficulty to sustain US dollar as a single international currency.

The Maastricht treaty was signed in 1991 with a view to replace all the currencies to Euro in 2002 and bring in a greater stability to exchange currency. London was the epicentre of Eurodollar market in 1980s where the banks lent Dollars against Pounds to maintain their global leadership position. South East Asia and South America including other Asian countries also saw their currency being devalued against the US Dollar.

Later the coming together of banks, government agencies, insurance  companies, financial firms etc., formed world’s largest market for trading of currencies called the Forex market. The countries stopped bartering goods and adopted the foreign exchange to meet their purpose. For more information, you can check the facebook page.

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Category: Currency Trading

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