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Monday, July 20, 2009

Forex history


Since 1867 the "gold standard" has been in use to allow a national currency to be exchanged only for gold in order to "return" money and prevent governments from arbitrary emission, which accelerates inflation. But this "standard" was not able to solve all problems.

The country's growing economy led to the import increase to the point where gold resources were depleted. As a consequence, the amount of money in circulation decreased, interest rates grew and economic activity slowed down to the stage of recession. Then prices usually fell and other countries started to import cheap goods which led to an increase in gold reserves, monetary growth, lower interest rates and overall strengthening of the economy of the initial country. Most countries had been developing according to this "boom-bust" model before World War I, which interrupted the flow of commerce and gold.

After World War II and until 1971 there existed the so-called Bretton Woods agreement under which exchange rates of national currencies were fixed to the dollar, and the dollar itself was pegged to gold with the price per ounce set equal to 35 dollars. It was prohibited for countries participating in the agreement to conduct devaluation in order to improve the exchange rate of its currency.

Post-war reconstruction of the global economy and the increase in trade between the countries demanded a reconsideration of the fixed rate, and in 1971 the Agreement was "temporarily" suspended. Then the history of Forex began. By 1973, currencies of the most developed nations were freely convertible, and their exchange rates were mainly defined by supply and demand. During the 1970s volatility and turnover increased, new financial instruments appeared, and currency trading began to attract venturers.

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