Forex Trading History
In 1967, a
Chicago bank refused a college professor by the name of Milton
Friedman a loan in pound sterling because he had intended to use the
funds to short the British currency. Friedman, he had perceived
sterling to be priced too high against the dollar, wanted to sell
the currency, then later buy it back to repay the bank after the
currency declined, thus pocketing a quick profit. The bank's refusal
to grant the loan was due to the Bretton Woods Agreement,
established twenty years earlier, which fixed national currencies
against the dollar, and set the dollar at a rate of $35 per ounce of
gold.
The Bretton Woods
Agreement, set up in 1944, aimed at installing international
monetary stability by preventing money from fleeing across nations,
and restricting speculation in the world currencies Prior to the
Agreement, the gold exchange standard--prevailing between 1876 and
World War I--dominated the international economic system. Under the
gold. exchange, currencies gained a new phase of stability as they
were backed by the price of gold. It abolished the age-old practice
used by kings and rulers of arbitrarily debasing money and
triggering inflation.
But the gold
exchange standard didn't lack faults. As an economy strengthened, it
would import heavily from abroad until it ran down its gold reserves
required to back its money. As a result, money supply would shrink,
interest rates rose and economic activity slowed to the extent of
recession. Ultimately, prices of goods had hit bottom, appearing
attractive to other nations, which would rush into buying sprees
that injected the economy with gold until it increased its money
supply, and drive down interest rates and recreate wealth into the
economy. Such boom-bust patterns prevailed throughout the gold
standard until the outbreak of World War I interrupted trade flows
and the free movement of gold.
After the Wars,
the Bretton Woods Agreement was founded, where participating
countries agreed to try and maintain the value of their currency
with a narrow margin against the dollar and a corresponding rate of
gold as needed. Countries were prohibited from devaluing their
currencies to their trade advantage and were only allowed to do so
for devaluations of less than 10%. Into the 1950s, the
ever-expanding volume of international trade led to massive
movements of capital generated by post-war construction. That
destabilized foreign exchange rates as set up in Bretton Woods.
The Agreement was
finally abandoned in 1971, and the US dollar would no longer be
convertible into gold. By 1973, currencies of major industrialized
nations became more freely floating, controlled mainly by the forces
of supply and demand which acted in the foreign exchange market.
Prices were floated daily, with volumes, speed and price volatility
all increasing throughout the 1970s, giving rise to new financial
instruments, market deregulation and trade liberalization.
In the 1980s,
cross-border capital movements accelerated with the advent of
computers and technology, extending market continuum through Asian,
European and American time zones. Transactions in foreign exchange
rocketed from about $70 billion a day in the 1980s, to more than
$1.5 trillion a day two decades later.
Free Floating
Currencies
In 1971 and 1972
two more attempts at free-floating currency against the U.S. dollar,
namely the Smithsonian Agreement and the European Joint Float. The
first was just a modification of the Bretton-Woods accord with
allowances for greater fluctuation, while the European one aimed to
reduce dependence of their currencies on the dollar. After the
failure of each of these agreements, nations were allowed to peg
their currencies to freely float, and was actually mandated to do so
by 1978 by the IMF. The free-floating system managed to hold out for
several years, but many denominations had failed against the strong
currencies.
The Euromarket
A major catalyst
to the acceleration of foreign exchange trading was the rapid
development of the euro-dollar market; where US dollars are
deposited in banks outside the US. Similarly, Euromarkets are those
where assets are deposited outside the currency of origin. The
Eurodollar market first came into being in the 1950s when Russia's
oil revenue-- all in dollars -- was deposited outside the US in fear
of being frozen by US regulators. That gave rise to a vast offshore
pool of dollars outside the control of US authorities. The US
government imposed laws to restrict dollar lending to foreigners.
Euromarkets were particularly attractive because they had far less
regulations and offered higher yields. From the late 1980s onwards,
US companies began to borrow offshore, finding Euromarkets a
beneficial center for holding excess liquidity, providing short-term
loans and financing imports and exports.
London was, and
remains the principal offshore market. In the 1980s, it became the
key center in the Eurodollar market when British banks began lending
dollars as an alternative to pounds in order to maintain their
leading position in global finance. London's convenient geographical
location (operating during Asian and American markets) is also
instrumental in preserving its dominance in the Euromarket.
The Birth of
Euro
Although
Europeans were already very comfortable with the concept of forex
trading, much of the rest of the world were still unfamiliar with
the territory. The establishment of the European Union in 1992 gave
birth to the euro seven years later, in 1999. The euro was the first
single-currency used as legal currency for the member states in the
European Union. It became the first currency able to rival the
historical leaders in the Foreign Exchange market and create the
stability that Europe and the forex market had long desired.
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