Saturday, July 4, 2009

The History of Forex

Foreign exchange of currencies can be dated back to ancient times, when merchants of different sorts traded coins from country to country. In ancient Egypt the first coins were used, and paper notes were added later on by the Babylonians. The history of Forex continues in the middle ages when foreign exchange was maintained by international banks. This enabled a growth of the European powers and contributed to the spread of foreign currencies throughout Europe and the middle east. The history of Forex is therefore perhaps the longest of all the other markets, and this is one of the advantages of Forex over other market options.

1816-The Gold Standard Changes Forex History
The gold standard was a trading standard that was used as a fixed value for trading commodities. This means a certain weight in gold was established and used to trade for other currencies. This started to be in use in 1816, when the British pound was defined as 123.27 grains of gold. This meant that the British banks had a specific value that was defined and this in turn helped set the UK standard currency as stable.

The strength of a country's currency depended on the amount of gold reserves the country maintained. So, if country A's gold reserves are double the gold reserves of country B, country A's currency would be twice in value when exchanged with the currency of country B.

The US and the rest of the world adopted the gold standard by 1880. Under the gold exchange, currencies gained a new phase of stability as they were backed by the price of gold. 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; consequently, the 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, who 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 and the European nations stopped using the gold standard.

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 Britain included a major counterfeiting effort against its currency. The UK had suffered a great financial blow and its economical state was disastrous. In fact, WWII vaulted the U.S. dollar from a failed currency after the stock market crash of 1929 to a benchmark currency by which most other international currencies were compared.

At a conference held at Bretton Woods in New Hampshire in 1944, a new international financial framework was introduced specifically to stabilize world trade and the global economic situation. Particularly affected were Europe and Japan.

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