The History of Forex
Forex, or Foreign Exchange, refers to the trading of one currency for another. This was traditionally done in order to facilitate the payment of goods and services in the country from which these goods and services originated. Today, however, currencies are widely traded as an investment vehicle rather than as a way to facilitate trade. To better understand the Forex market, let’s look at its origins.
Barter System
Before Forex history began, prior to the existence of money, surplus goods were traded between different communities through the barter system. For example, if a person had surplus wheat, he could exchange it for something else perceived to have a similar value. Nevertheless, this form of trading had one major disadvantage: namely, it depended on a “coincidence of wants.” The seller of the surplus wheat needed to find someone who not only wanted wheat, but who also possessed something the seller wanted. Accordingly, no trade could take place if there was no “coincidence of wants.” In the absence of a standard measure for the goods to be traded against, a direct swap was often impossible.
Introduction of Money
In order to overcome the limitations of the barter system, traders began to trade their goods and services through an intermediary commodity. This intermediary commodity became the store of value with which traders exchanged their surplus goods and services. With the introduction of commodity money, traders were able to make the market for all other commodities more liquid. Initially, things like cowry shells and beads were used as a medium of exchange. Later, metals like bronze and copper were used.
Precious Metals as Money
As trade developed between the different communities in the ancient world, the use of precious metals like Silver and Gold became the preferred choice for money due to their scarcity and durability.
The Development of Paper Money
As the use of precious metals as money became more widespread, people discovered that carrying heavy coins was unsafe and inconvenient. To get around this, merchants began paying for goods and services with receipts of their deposited money and promissory notes. These were the precursors of paper money.
The Gold Standard
Initially, Gold and Silver were used as the standards to which Fiat money was pegged. However, with the establishment of a new minting ratio in 1717 for Gold and Silver by Sir Isaac Newton, Silver was phased out of circulation. By 1812, the UK had formally adopted the Gold Standard for its monetary system. As the UK was the leading industrialized power during that era, other countries also began adopting the Gold Standard as the basis of their own monetary systems.
The Bretton Woods Conference
The Gold Standard proved to be wholly inadequate in coping with the aftermath of the 1st and 2nd World Wars. This led to the Bretton Woods Conference of 1944, when 44 countries agreed to a new monetary order according to which countries based their monetary systems on the dominant US Dollar.
Abolishment of the Gold Standard
On August 15, 1971, the US terminated the convertibility of the US Dollar to Gold. The “Nixon Shock” resulted in the US Dollar becoming the world’s reserve currency; after that, all currencies pegged to the US Dollar became “free floating.” This shift helped make the Forex market what it is today, with an estimated daily turnover of three (3) trillion dollars.
1 comments :
Post a Comment