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The foreign exchange or forex market is the largest capital market in the world with an average daily turnover of more than $2 trillion U.S. Dollars per day. The origins of this enormous financial market go back to the barter system when people exchanged goods to participate in commerce.
As the world developed, and commerce among different countries grew, a medium of exchange was needed to facilitate transactions, and gold and silver became the first generally-accepted mediums.
The Gold Standard
The Gold Standard was first adopted in England in 1816. Other governments around the world gradually adopted the Gold Standard and began to issue paper currency that was immediately convertible to gold.
While this standard was suspended during the era of the Great Depression and WWII, it was subsequently reinstated by the Bretton Woods agreements of 1944. This important conference established a fixed price of $35/oz for gold and fixed all other major currencies to the U.S. Dollar, thereby making the Dollar the world’s main reserve currency.
The Modern Era of Floating Exchange Rates
By 1971, the United States had racked up substantial budget and trade deficits, thereby making the U.S. Dollar inappropriate to be the world’s sole reserve currency. Also, U.S. President Nixon unilaterally ended the Dollar’s convertibility into gold in August of 1971, effectively taking the U.S. currency off the Gold Standard.
By March of 1973, currency pressures had become dramatic enough that most major countries had allowed their currencies to float freely relative to the Dollar. This marked the start of the modern-day fluctuating exchange rate system.
European Currency Union
Nevertheless, controlled exchange-rate systems were attempted periodically even after that time. These attempts included the more successful European Exchange Rate Mechanism of the 1990’s. This mechanism, combined with the increasing political integration of Europe, eventually led to the monetary union of the twelve European nations that created a consolidated currency known as the Euro.
To begin this consolidation process, the European Economic Community signed the Maastricht Treaty which created the European Union in 1991. In attempting to stabilize and fix exchange rates among the currencies of member countries, it proposed to eventually incorporate all twelve currencies into the Euro.
The planned European Monetary Union received a setback as the U.K.’s Pound Sterling was forced to leave the system and devalue in late 1992. Nevertheless, the Euro eventually replaced the national currencies of the other twelve European nations in 2002.
The Rise of Online Forex Trading
Since 2002, the forex market has grown exponentially, fueled by the widespread use of the Internet and the recent availability of online and even automatic forex trading. These developments have basically placed potential forex trading terminals in any home that has an Internet connection.
Furthermore, competition among online forex brokers has made smaller forex trading accounts possible for the masses that want to gamble on forex rate movements. Trading the forex market, which was once only possible for large institutions, such as major commercial and investment banks, portfolio managers and international corporations, has now become available to just about anyone with a few hundred dollars and a reliable Internet connection. How times have changed!
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