The origin of Forex trading can be traced to many centuries ago. The existence of different currencies and need to exchange them has been in practice since the Babylonians who were the first to use paper notes and receipts.
In ancient days, the barter system, where the value of goods was expressed in terms of other goods, was widely prevalent. The evident limitations of the barter system stimulated the formation of more generally accepted medium of exchange with a common base value.
People of Africa & Asia used feathers, stones and even teeth, but soon coins made from metals such as gold and silver, became an accepted means of payment. Later in the middle ages, paper form of governmental I.O.U was used by certain established nations, which forms the basis of today’s currencies.
In international trade the value of money was defined by the amount of gold that could be bought for it. This method was called “Gold standard.” At those times the strongest currency in the world was the British Pound. This system worked quite well until World War I.
During the war, when the expenses of the European countries increased considerably, the gold standard was abandoned by all except USA. Though the European countries tried to return to the gold standard after World War I, the world financial crisis, the Great Depression, and the World War II stood in the way of those plans.
Bretton Woods System
Before the end of World War II, the Allied nations felt the need to set up a monetary system to fill the “Gold Standard” void. So, in July 1944, the Allies assembled at Bretton Woods, New Hampshire, to formulate the Bretton Woods system of international monetary management, which instituted the following:
- Fixed exchange rates system
- U.S. dollar to become a main reserve currency instead of gold
- The formation of three international agencies:
o International Bank for Reconstruction and Development
o International Monetary Fund (IMF)
o General Agreement on Tariffs and Trade (GATT)
On August 15, 1971, U.S. President Richard Nixon closed the gold window, announcing that it would no longer exchange gold for the U.S. dollars as the treasury lacked sufficient gold. This marked the end of Bretton Woods System.
Current Exchange Rates
After the Bretton Woods system broke down, the world at last accepted the use of floating foreign exchange rates during the Jamaica agreement of 1976, eliminating the use of the gold standard. Most governments employ one of the following three exchange rate systems that are still used till date:
- Pegged rate
- Managed floating rate
Today Forex has become one of the biggest world markets (average daily turnover of USD 4 trillion) with enormous growth potential.