History of Foreign
The foreign exchange market (fx or forex) as we know it
today originated in 1973. However, money has been around in one form or another
since the time of Pharaohs. The Babylonians are credited with the first use
of paper bills and receipts, but Middle Eastern moneychangers were the first
currency traders who exchanged coins from one culture to another. During the
middle ages, the need for another form of currency besides coins emerged as
the method of choice. These paper bills represented transferable third-party
payments of funds, making foreign currency exchange trading much easier for
merchants and traders and causing these regional economies to flourish.
From the infantile stages of forex during the Middle Ages
to WWI, the forex markets were relatively stable and without much speculative
activity. After WWI, the forex markets became very volatile and speculative
activity increased tenfold. Speculation in the forex market was not looked
on as favorable by most institutions and the public in general. The Great
Depression and the removal of the gold standard in 1931 created a serious
lull in forex market activity. From 1931 until 1973, the forex market went
through a series of changes. These changes greatly affected the global economies
at the time and speculation in the forex markets during these times was little,
The Bretton Woods Accord
The first major transformation, the Bretton
Woods Accord, occurred toward the end of World War II. The
met at the United Nations Monetary and Financial Conference in
Bretton Woods, N.H. to design
a new global economic order. The location was chosen because, at the time,
was the only country unscathed by war. Most of the major European countries
were in shambles. Up until WWII, Great Britain's
currency, the Great British Pound, was the major currency by which most currencies
were compared. This changed when the Nazi campaign against
included a major counterfeiting effort against its currency. In fact, WWII
vaulted the U.S. dollar from a failed currency after the stock market crash
of 1929 to benchmark currency by which most other international currencies
were compared. The Bretton Woods Accord was established to create a stable
environment by which global economies could restore themselves. The Bretton
Woods Accord established the pegging of currencies and the
International Monetary Fund (IMF) in hope
of stabilizing the global economic situation.
Now, major currencies were pegged to the U.S. dollar. These
currencies were allowed to fluctuate by one percent on either side of the
set standard. When a currency's exchange rate would approach the limit on
either side of this standard the respective central bank would intervene to
bring the exchange rate back into the accepted range. At the same time, the
US dollar was pegged to gold at a price of $35 per ounce further bringing
stability to other currencies and world forex situation.
The Bretton Woods Accord lasted until 1971. Ultimately,
it failed, but did accomplish what its charter set out to do, which was to
re-establish economic stability in Europe and
The Beginning of the free-floating system
After the Bretton Woods Accord came the
Smithsonian Agreement in December of 1971.
This agreement was similar to the Bretton Woods Accord, but allowed for a
greater fluctuation band for the currencies. In 1972, the European community
tried to move away from its dependency on the dollar.
The European Joint Float was established
by West Germany,
and Luxemburg. The agreement was similar to the Bretton Woods Accord, but
allowed a greater range of fluctuation in the currency values.
Both agreements made mistakes similar to the Bretton Woods
Accord and in 1973 collapsed. The collapse of the Smithsonian agreement and
the European Joint Float in 1973 signified the official switch to the free-floating
system. This occurred by default as there were no new agreements to take their
place. Governments were now free to peg their currencies, semi-peg or allow
them to freely float. In 1978, the free-floating system was officially mandated.
In a final effort to gain independence from the dollar,
created the European Monetary System in July of 1978. Like all of the previous
agreements, it failed in 1993.
The major currencies today move independently from other
currencies. The currencies are traded by anyone who wishes. This has caused
a recent influx of speculation by banks, hedge funds, brokerage houses and
individuals. Central banks intervene on occasion to move or attempt to move
currencies to their desired levels. The underlying factor that drives today's
forex markets, however, is supply and demand. The free-floating system is
ideal for today's forex markets. It will be interesting to see if in the future
our planet endures another war similar to those of the early 20th century.
If so, how will the forex markets be affected? Will the dollar be the safe
haven it has been for so many years? Only time will te
TIMELINE OF FOREIGN EXCHANGE
1944 Bretton Woods Accord is established to help stabilize the global
economy after World War II.
1971 Smithsonian Agreement established to allow for greater fluctuation
band for currencies.
1972 European Joint Float established as the European community tried
to move away
from its dependency on the U.S. dollar.
1973 Smithsonian Agreement and European Joint Float failed and signified
the official switch to a free-floating system.
1978 The European Monetary System was introduced so other countries
could try to gain independence from the U.S. dollar.
1978 Free-floating system officially mandated by the IMF.
1993 European Monetary System fails making way for a world-wide free-floating