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History Of Forex Trading
The annals of currency or forex trading have witnessed many ups and downs in its chequered history. One can clearly trace seven stages of the evolution of modern-day currencies and consequently enough forex trading.
These are:
(i) The barter system;
(ii) Gold and silver coins;
(iii) The paper currency regime;
(iv) Gold convertibility in the pre-World War-I phase;
(v) Central banks role, inflation & political instability during & after World War-I;
(vi) World War-II & Bretton Wood suggestions;
(vii) The recommendations of IMF World Bank & GATT ;
(viii) European attempts;
(ix) SE Asian & South American currency devaluation; and
(x) The Free market maneuverability leading to the birth of the largest forex market.
Let’s analyse each one of them and see how one stage flows into the other.
The roots of the forex market are traced to the barter system – the economy (at the early stage of history) based on exchange of goods in terms of value. It had major limitations.
(ii) Gold and silver coins: This led to the evolution of another benchmark of value which heralded the age of metals. Gold and silver coins were generally accepted as the ideal means of payment across the globe. They could be stored due to their reliable storage as well.
(iii) The paper currency regime: During the middle ages, governmental IOUs (I owe you) in the forms of specially manufactured paper were introduced in the politically stable regimes. These are the bases of modern-day currency mediums.
The respective regimes had to use force to make the masses accept these IOUs in place of or along with the hitherto circulating gold and silver currencies. To further elicit public support, the governments with the backing of the countries’ respective central banks provided for convertibility into gold the values of the paper currencies. Even then, there were practical problems as to when such convertibility could actually take place.
(iv) Gold convertibility in the pre-World War-I phase: Nevertheless, this system was on place till the commencement of World War-I. As the war raged and people frantically queued to do so, the banks were forced to draw the lines. This fostered the notion that the central reserves of the government were not fully secure.
(v)Central banks role, inflation & political instability during & after World War-I: Close on the heels of this crisis was yet another. Inflation was up what with the market having a surfeit of paper currencies not adequately supported by gold cover. This, in turn, led to political instability. The concerned central banks introduced forex (foreign exchange) controls with a three-fold objective. They had the three gargantuan responsibilities of checking the market forces from creating more chaos, of shielding the national interests, and also of evolving a mechanism to shield the central reserves of the government. The banks did rise to the occasion, but the relief was short-lived.
The destabilizing global financial disaster led to World War-II.
(vi) World War-II & Bretton Wood suggestions: During World War-II, the global economy witnessed another disastrous period. Towards the fag end of WW-II, the USA took the lead to set things aright. Consequently, in July 1944, the Bretton Woods agreement was reached.
The moot point of this economic treaty was that a new world currency reserve system was formulated. It was to be based on the US dollar. Another significant decision of the Bretton Woods conference was that it gave a unanimous ‘NO!’ verdict against the suggestion of John Maynard Keynes for a new medium to serve as the new reserve for the world currencies.
(vii) IMF, World Bank & GATT deliberations: A notable feature of this period was the creation of the other financial institutions like the International Monetary Fund (IMF), the World Bank and General Agreement on Tariffs and Trade (GATT). These were attempts by the victors of the World War-II to seek a path for avoiding the prevalent monetary crises.
Whatsoever it may be, the Bretton Woods agreement paved the way for a system of fixed exchange rates. It also partly reinstated the gold standard. It, moreover, fixed the US dollar at USD35/oz. The agreement pegged the other main global currencies to the dollar – which at that point of time appeared to be more or less a permanent one.
But the Bretton Woods system also collapsed in the early 70s. The US dollar was facing severe crunch and was weakening as the sole global currency. Rising trade deficits and burgeoning budget forced President Nixon to suspend gold convertibility in August 1970. However, its swan song was sung a decade earlier — in the 60s — as national economies started drifting to different directions. The system was only kept on the resuscitation during the intervening years with several realignments.
After that, the majority of the countries removed restrictions on capital flows. This allowed enough elbow spaces to the market forces which interacted freely and started readjusting the foreign exchange rates during the following several decades.
But, the fact remained that these foreign exchange trading rates were merely as per the perceived values of the parties involved. Nevertheless, this phase was crucial for transforming foreign exchange trading into the largest market in the globe.
(viii) European countries’ attempts: Attempts were still on to find out fixed exchange rates. It was in 1979 that the European Economic Community (EEC) introduced the European Monetary System. Several European countries were forced to undertake devaluations of their weak currencies, during 1992-93. These economic pressures jettisoned this system as well.
The continued search for stability in currency and forex trading in Europe bore fruit in 2001. The currencies were not only nursed to health but many were, in fact, also replaced the ‘Euro’.
(ix) SE Asian & South American currency devaluation: This 1997 ominous financial drama was another watershed. It took place in the fag end of that year. Many currencies of the SE Asian countries, having the hitherto fixed exchange rates with the US dollar, were devalued one after another. This made the grounds of those South American currencies that stood on the same ground rather shaky. These developments forced a rethink on the US dollar supremacy. The economic pundits also put on their thinking caps to thrash out a fixed currency exchange rate.
(x) Free market forces’ birth to its typical forex trading system: Finally the financial institutions and investors have in recent years come together on a level playground – the forex trading market, which is now the globe’s biggest investment sector. Daily, above USD 1,200 billion is traded on its floors: it is 100 times more than what is traded daily in the combined bond and stock markets of the world.
