Ever wandered what forex trading is and when was it started? Let’s take a brief walk through of some of the development and growth of the market. In the next section, let’s quickly have a look at what led to the Forex Trading market as it is known today.
The Gold Standard System
In the year 1875, Gold Standard System was born making the most important move in the history of developing forex market. The main idea about the gold standard was that governments will use gold to make international payments in exchange of goods and products. In that year currency will then be replaced by gold and vice versa. However the gold standard system broke in the early nineteenth century during the beginning of World War I. It suddenly became hard and more harder to ship around the gold in exchange of heavy goods required to manage the war.
The Bretton Woods System
The system was formed in 1944 before the end of World War II and just after many allies have abandoned the Gold Standard System. There was a huge need for a monetary system to be formed in order to manage international economy after a war. Nations negotiated and came up with a comprehensive system called the Bretton Woods which the U.S Dollar would replace a gold and become a standard convertibility of world’s currency. The following are the main key points that the system must address:
- A method of fixed exchange rates;
- The U.S. dollar replacing the gold standard to become a primary reserve currency; and
- The creation of three international agencies to oversee economic activity: the International Monetary Fund (IMF), International Bank for Reconstruction and Development, and the General Agreement on Tariffs and Trade (GATT).
The Current Exchange Rates
Eventually the Bretton Woods System broke down. During the Jamaica agreement in 1976, the world finally accepted the use of floating foreign exchange rates meaning the gold standard system will be permanently abolished. But it didn’t mean that the it was not used but rather no longer accepted in major markets. Governments started engaging in the following three exchange rate systems:
- Pegged rate; and
- Managed floating rate.