The history of the appearance of the Forex currency market
Today, the foreign exchange market is one of the largest, most liquid and accessible in the world, and has been shaped by many important world events, such as Bretton Woods and the gold standard. Where did it all begin?
In the 1800s, countries adopted the gold standard. The gold standard worked well until World War I, when European countries had to stop using it to print more money for the war.
From then until the beginning of the 20th century, the money market was based on the gold standard. Countries traded with each other because they could exchange their currency for gold. However, during the First World War, the gold standard was not maintained.
The first major change in the money market. It came after the abolition of the Bretton Woods system. The Bretton Woods system was established to create a stable framework for the world economy, and an important part of this was the creation of a regulated market for fixed exchange rates.
A regulated fixed exchange rate is an exchange rate policy where one currency is pegged to another. In this case, other countries “peg” their exchange rates to the US dollar. The dollar was pegged to gold because, at the time, the US had the largest gold reserves in the world.
Ultimately, the Bretton Woods agreement failed to peg the dollar to gold because increased borrowing and government spending led to an increase in the number of dollars in circulation without enough gold to back them.
In 1971, President Richard Nixon ended the Bretton Woods system and the dollar was soon free to trade with other foreign currencies. Following the Bretton Woods agreement, the Smithsonian Agreement was signed in December 1971, which allowed for similar but larger currency fluctuations. The US devalued the dollar to below $38 per ounce.
In 1972, the European Community sought to eliminate its dependence on the dollar: West Germany, France, Italy, the Netherlands, Belgium, and Luxembourg established a common European system of floating exchange rates. Both agreements made the same mistakes as Bretton Woods and collapsed in 1973. These mistakes led to a formal transition to a system of floating exchange rates.
The rapid appreciation of the US dollar against other major currencies in the early 1980s hit exporters hard, with the US current account deficit reaching 3.5% of GDP. In response to the stagflation that began in the early 1980s, Paul Volker raised interest rates, leading to a stronger dollar (and lower inflation), but at the expense of US industry's competitiveness in world markets.
Traders quickly realized the profit potential of the new currency trading market: Despite government intervention, there would be significant volatility, and as long as there was volatility, there would be profit. Ten years after the collapse of the Bretton Woods system, Europe signed a series of treaties linking the countries of the post-World War II region, but none of them were as fruitful as the 1992 Maastricht Treaty, named after the Dutch city where the conference was held. The treaty, which was developed by the European Union (EU), led to the introduction of the euro and created a harmonized package of foreign and security policy initiatives, among other things. The treaty has been amended several times, but the introduction of the euro has brought clear benefits to European banks and businesses, as it eliminates currency risk in an increasingly globalized economy.
When it comes to currencies traded on the Internet, everything has changed: Currencies that were previously banned by totalitarian political regimes can now be traded. New markets have developed, for example in Southeast Asia, attracting capital and currency speculation.
The history of currency markets since 1944 is a classic example of free markets in action. Competitive forces have created markets with unprecedented liquidity. Spreads have fallen dramatically due to the intensification of online competition between trusted players. Individuals exchanging large sums of money now have access to the same electronic communication networks as international banks and traders. Today, the foreign exchange market is the largest in the world. The daily turnover in the foreign exchange market exceeds USD 5,000 billion. The future of the FX market is uncertain and ever-changing, creating endless opportunities for FX traders.