Walking Through Forex History
At present, the foreign exchange market is the biggest existing financial market and is participated by governments, currency speculators, central banks, multinational corporations, commercial banks and other financial institutions. In fact, an average of $3 trillion dollars is traded in these markets every day. Indeed, the market has grown and prospered so much through the years. To better appreciate its growth and the reason for its existence, it is crucial to be familiar with forex history.
Forex history can be traced back to that time when our ancestors trade goods for other goods through bartering. This system is inefficient and usually resulted to lengthy negotiations before a deal can be made. Years later, metals like bronze, silver and gold were reduced to standard coin sizes and were used for trading. During the middle ages, paper IOUs became commonly used as a medium of exchange.
Many governments had recognized the convenience of carrying around paper currencies instead of carrying around precious metals. This was the reason why many large governments had adopted the paper currency and backed the value of these papers with gold reserves. This forex history milestone led to the introduction of the gold standard system. In 1944, a foreign exchange system was established and came to be known as the Bretton Woods Agreement. Representatives from 45 countries came to attend this conference for discussion about the foreign exchange system. This conference also resulted to the formation of the International Monetary Func (IMF). According to this agreement, the value of the US dollar was pegged at $35 per ounce and the values of other currencies were compared against the US dollar. "Pegging" is defined as the system of connecting the value of a certain currency to gold. This forex history milestone aimed at introducing the foreign exchange market to the world to make the world economy stable. Due to the Second World War, the economy of many nations has suffered. During the sixties, however, national economies moved in different directions which paved way to its collapse. The Bretton Woods Agreement was canceled in 1971 which meant that the US dollar is no longer convertible to gold leading to the free-floating system which was evident in economies of major industrialized nations. New financial instruments, market deregulation and trade liberalization were consequences of this system.
Another forex history milestone is the introduction of two failed agreements which lead to the official transition towards the free-floating system. The Smithsonian Agreement and the European Joint Float were made in 1973. The Smithsonian Agreement allowed greater fluctuation band for currencies while the European Joint Float allowed a greater fluctuation range in currency values. Based on forex history, the existence and development of the Eurodollar market contributed to the growth of Forex trading. A Eurodollar market is where assets like US dollars are deposited outside the currency of origin. Indeed, the foreign exchange market has come a long way from its origins. As of April 2006, average daily global turnover in traditional foreign exchange market transactions summed up to $2.7 trillion based on data from London, New York, Tokyo, and Singapore Foreign Exchange Committees.
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