History Of Foreign Exchange Market

The history of foreign exchange is long and can be traced back to the ancient Middle East and Middle Ages, which saw the currency exchange beginning take to take shape. Let us look at the foreign exchange in a historical perspective which is the main focus of this page.

At a fairly early stage in the history of currency exchange, the value of goods was expressed in terms of other goods. The economy was based on barter system between individual participants of market. There were obvious limitations. There arose a need to set a common benchmark of value in different economies. Objects like teeth, feathers, pretty stones etc; served this purpose. But soon metals like gold and silver, established themselves as an accepted means of payment.

Earlier times saw the minting of coins from the preferred metal. It was only during the Middle Ages that the paper form of governmental IOUs was introduced. One can say that this was a major landmark in the forex history.

Most central banks supported their currencies with convertibility to gold before World War I. Paper money could always be exchanged for gold, but in reality this did not happen often. This gave arise to unwelcome notion that there was not necessarily a need for full cover in the central reserves of the government. Sometimes, the abundant supply of paper money without gold cover led to a very disturbing inflation, and often resulting political instability, as the foreign exchange market history reflects. There arose a need to prevent market forces from punishing monetary irresponsibility.

History of Foreign Exchange saw the Bretton Woods agreement reached in the latter stages of World War II. U.S.A. took the initiative in July 1944. Other international institutions such as the IMF, the World Bank and GATT (General Agreement on Tariffs and Trade) took birth at the same time, searching for a way to avoid the destabilizing monetary crises which led to the war. The Bretton Woods agreement allowed the system of fixed exchange rates, thus reinstating the gold standard and fixing the US dollar at USD35/oz as well as the other main currencies to the dollar. This was intended to be permanent.

In the sixties, forex history saw the national economies moving in different directions. The Bretton Woods system had to face growing pressure as national economies moved in different directions during the sixties. A number of realignments kept the system alive for a long time, but eventually Bretton Woods collapsed in the early seventies following president Nixon's suspension of the gold convertibility in August 1971. The dollar was no longer suitable as the sole international currency at a time when it was under severe pressure from increasing US budget and trade deficits.

The following periods saw the foreign exchange market developing into the largest global market by far. As restrictions on capital flows were removed in most of the countries, it gave the market forces complete flexibility and freedom to adjust foreign exchange rates according to their perceived values.

In 1979, as we course through the history of currency exchange, the European Monetary System was introduced by the EEC. The search for currency stability has continued in Europe till recently with the renewed attempt to not only fix currencies but actually replace many of them with the Euro in 2001.

In the latter part of 1997, the lack of sustainability in fixed foreign exchange rates gained new relevance with the events in South East Asia. This period saw the devaluation of currency after currency against the US dollar. Other fixed exchange rates, in particular in South America, looked very vulnerable during these times. Today the size of foreign exchange markets overwhelms any other investment market by a large factor. Investors and financial institutions have found a new playground. It stands at more than USD 3,000 billion is traded every day.