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The History of Foreign Exchange Market (FOREX)

By Edited Nov 13, 2013 0 0

Foreign exchange system in world economy was formed over long a period of time. In 1867 a "gold standard" was introduced. This standard allowed exchange national currency for the gold exclusively. Gold was backing of every national currency and prevented uncontrollable currency emissions thus decreasing rate of inflation. Nevertheless, not all problems could be solved by the 'gold standard' model.

Economically developing countries increased import volume until complete exhaustion of gold reserve that lowered monetary aggregates volumes, resulting in interest rate rising and lowering economic growth rate to the recession state of the market.

In the sequel commodities value decreased to such a low extend that adjacent countries started to buy them intensively, thus provoking inbound gold flow, money supply increase. Further it caused lowering of interest rate and upsurge of economy. The majority of countries economically developed with such cycles with series of expansions and recessions until the World War I when gold and goods flows were suspended.

After World War II, up to year 1971 well-known Bretton Woods Agreement had been applied. According to this agreement national currency was exchanged for a US dollar using fixed exchange rate. US dollar was compared to gold: 1oz of gold was equal to 35 USD. Countries participated in Bretton Woods Agreement did not have a privilege of devaluation for the purpose of improvement of national currency exchange rate.

With the lapse of time fixed exchange rate started to impede the postwar economy development and commodities exchange between countries. In 1971 agreement was temporarily suspended. That was the moment of Foreign Exchange Market birth.

By the year 1973 currency of most economically developed countries turned out to be convertible currency and its' exchange rates were determined mainly demand to supply ratio. In the period of seventies there was increase of currency turnover and volatility of it's' exchange rates. Various financial instruments begun to be created and currency exchange operations became attractive to speculators.

For the innovation we should be thankful to the Jamaican exchange system, foundations of which were introduced in March of 1973 with the attendance of 20 major economically developed countries of non-Communist alliance.

Later, in 1975 a president of France Valery Giscard d'Estaing and Chancellor of West Germany Helmut Schmidt (both ex-ministers of finance) offered heads of other leading states to arrange an unofficial summit. First "Big Eight" summit took place on in 1975 at Rambouillet with participation of USA, Germany, UK, France, Italy and Japan (in 1976 Canada joined the summit and Russia did in 1998). One of the main subjects was structural reform of international monetary system.

Foreign Exchange Market (FOREX) was created on 8th of January, 1976. During the conference of ministers of International Monetary Fund members in Kingston (Jamaica) a new agreement on new structure of international monetary system was accepted. The new agreement was actually a number of amendments to International Monetary Fund regulations. New system replaced postwar Bretton Woods monetary system. From that moment free floating exchange rate became the only method of currency exchange.

With the new monetary system renunciation from principle of purchasing value of money determination based on value of its' gold equivalent (gold standard) took place for good and all.
Currency of new agreement federates got rid of official gold content. During currency exchange on a free market uncontrolled prices were applied. That principle gave birth to freely convertible currency term.

At this moment daily FOREX trading volume is from two to four billion US dollars. There is no precise volume information because there are no requirements for obligatory registration and publication of all deals on said market. A part of this volume is provided by margin trading. Such a high daily trading volume guarantees FOREX high liquidity regardless of purpose of deals.



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