History of Forex

In this article, we will learn about the history of forex, forex basics. It is important to know about the history of Forex because we need to understand how our money system has worked in the past to understand how we can use it to our advantage in moving forward.

Bartering System

In the bartering system people traded goods and services, skills, talents and even people they basically traded what they didnt need for things they wanted.

Disadvantages of the Bartering system

• Transporting goods was expensive and there was lots of risks
• Having something that no one wanted
• Hard to repay dept

Coins

Money in the shape of small knives and arrows made out of bronze was used in China, with time this type of money was abandoned for something in the form of a circle which later became some of the first coins. The first minted coins were created in Lydia in the 7th century BC. These coins were made from ELECTRUM.

Advantages Of The Coins

• Coins were easier to carry
• Transportation was no more an issue
• People could trade what they wanted for what they needed
• Merchants did not have to use scales to measure the metal, they could determine the value at a glance.

Disadvantages Of The Coins.

• Coins could be counterfeited.
• Coins were also very hard to carry.
• coins weight could change over time.

Paper Money

The Chinese invented paper in the form of notes around 700 AD, coins of different wight became too cumbersome to carry.

China allowed private institutions to store there gold and silver coins in exchange for certificates that correlated directly to what they had stored, these paper notes could be easily exchanged back to electrum. The advantages to paper were that it was easy to transport due to it being light, foreign trade became easier now that you could exchange specific denominations.

When Marco Polo visited china he brought the idea of paper money back to Europe with him, unfortunately, these papers could also be easily counterfeited.
While these notes were meant to be a representation of the money being stored institutions continuously printed more notes than they had gold and silver, this affected the public trust in these institutions.

Gold Standard

Paper money did not see popularity in the west until about the 1600s. Before WWI (World War I) many countries started printing paper money than they had gold so this caused the devaluation of their money.
After WW1 in order regain worth, many countries agreed to the gold standard where all their currencies would be backed by gold.

Advantages

• People no longer had to carry their gold
• Kept inflation in check
• Fixed exchange rates
• Disadvantages
• Gold would have to follow if there was a net transfer of currency from one country to another
• All countries had to maintain money supply to the fixed quantity of gold

Eventually, countries started to abandon the gold standard during the second world war.

After WWII countries came together to determine a money system that would work, something that will allow them to trade and keep the currency exchange rate fixed, also keep all countries in this agreement.

The Bretton Woods System 1944–1971

The first significant change of the foreign exchange market, the Bretton Woods System, which took place towards the end of World War II. At the United Nations Monetary and Financial Conference in Bretton Woods, NH, the United States, Great Britain, and France met to design a new global economic order. The place was chosen because the US was the only nation that had been unharmed by war at the time. Much of Europe’s big countries had been in disarray. In fact, after the stock market crash of 1929, WWII vaulted the US dollar from a collapsed currency to a benchmark currency with which most other foreign currencies were contrasted.

The Bretton Woods Agreement was created to form a sustainable environment through which global economies would be able to recover. It tried this through the development of a flexible pegged foreign exchange market. An adjustable peg defines a currency regime in which a country allows the value of its currency to float on the market but only within a tight band before the central bank intervenes to restore the peg.

Ultimately, the Bretton Woods agreement failed to peg gold to the U.S. dollar because there was not enough gold to back up the amount of U.S. dollars in circulation due to increased government lending and spending. President Richard M. Nixon terminated the Bretton Woods agreement in 1971, which quickly led to the US dollar’s floating exchange rate against other international currencies.

In conclusion, 44 countries came together in 1944, in the Bretton Woods to come up with a money system that will benefit all countries that decided to participate in foreign trade, the United States holding two-thirds of the world’s gold at that time, the U.S, Dollar was chosen to become the worlds reserve currency, as a result in the Forex market you will notice that the U.S. Dollar has the highest volume when it comes to trade because most countries tend to deal with U.S. Dollar.
After this meeting, two types of the institute was created

• International Monetary Fund (IMF).
• World Bank.

The IMF’s job was to lend money to countries that needed help in other to keep them from printing more money, which would devalue that countries money.

The World Banks job was to lend money to the new developing countries that wanted to expand which was also an effort to keep them from just creating money.

In august 15, 1971, President Nixon, closed gold window and announced that the U.S. would no longer back gold, due to the Bretton Wood system severly constraining.

Floating Exchange Rate

Currencies value are now determined by the floating exchange rate, these regimes are not influenced by the government but through the forces of supply and demand in the Forex market, because of this, the value of a currency can change freely some countries included in the floating exchange rate regime include; the U.S, Canada, and England. China does not participate in the floating exchange rate regime.

The European community tried to move away from its reliance on the US Dollar in 1972. West Germany, France, Italy, the Netherlands, Belgium, and Luxemburg then created The European Joint Float. Both negotiations made mistakes such as the Bretton Woods Agreement, which failed in 1973. The result of these failures was an official switch to the floating exchange rate system.

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