From Metal to Modern-Foreign Exchange Evolution

2023-08-28
Summary:

Ancient trade sparked forex history with coins and traders emphasizing exchange issues. 1970s shifts paved the path to today's forex market.

The Historical Origins of the Foreign Exchange Market


Where there is currency, there is a foreign exchange trading market.


The origin of the foreign exchange market can be traced back to trade activities in ancient times. In the early stages of human civilization's development, people from different regions began to engage in cross-border trade, exchanging goods and resources they needed. However, due to the different currency forms in different regions, this leads to exchange rate issues, namely how to exchange currencies. With the expansion of trade scale and the continuous development of trade networks, the foreign exchange market has gradually formed.


Its history can be traced back thousands of years BC, when the first batch of metal coins appeared in Egypt. From the current perspective, foreign exchange trading began to develop in the Middle Ages. This is closely related to the development of international trade and navigation. Italian money changers who earn money by exchanging currencies from different countries are considered among the first batch of money changers.


With the development of international relations, the market contour has become increasingly clear, and the foreign currency exchange market has undergone changes. The most significant changes in the foreign exchange trading market occurred in the 20th century. In the 1970s, when the fixed exchange rate system of one currency against another was abolished, the foreign exchange market gained modern characteristics.

After lifting the restrictions on exchange rate fluctuations, a new form of business emerged: earning profits under the conditions of a free system of exchange rate fluctuations. Moreover, exchange rate changes are influenced by all possible market conditions and are only regulated by supply-and-demand relationships.


Russia's foreign exchange emerged in the 1990s with the development of free market relations. The most advanced banks quickly realized that they could make considerable profits in this market. So a trading department was established to engage in speculative activities in the money market. Professionals in this field have quickly become popular, not only in Russian banks but also in some Western banks. The number of traders is constantly increasing every year.


The main stages of the development of the foreign exchange market (according to modern encyclopedias)

In the 1930s. Global financial crisis. Economic and trade relations have also been disrupted. The reign period of the gold coin standard has become a thing of the past. In the mid-1930s, London became the world financial center. The pound has become the main currency for foreign exchange transactions and the establishment of foreign currency reserves. At that time, in slang, the pound was referred to as "cable". At that time, the communication method for transactions was to transmit telegrams and information through cables, hence the name.


In 1930. The Bank for International Settlements was established in Basel, Switzerland. The purpose of establishing this bank is to provide financial support to newly independent countries and countries facing temporary balance of payments deficits.


In 1944. The Bretton Woods Conference was held in the United States. It is considered the end of competition between the UK and the US. Two important figures attended the meeting: John Maynard Keynes (UK) and Harry Dexter White (US). They have successfully established and opened up a new order for the development of the world financial system under current conditions.

The main contents of the Bretton Woods system

The International Monetary Fund (IMF) has become the main institution for regulating world financial and economic relations.

Declare currencies that will play an international reserve role (USD and GBP);

Determine the adjustable parity of the currency linked to the US dollar (with a permissible deviation of -1%); The US dollar is linked to gold ($35 per ounce of gold);

IMF member states must obtain IMF consent before having the right to modify parity.

After the transition period ends, all currencies should remain convertible. To follow this principle, governments should maintain international reserves and intervene in the foreign exchange market when needed.

IMF member countries pay fees in currency and gold.


1947. In order to resist the arrival of communism, the United States adopted the European Economic Revival Plan. The US Secretary of State, Marshall, elaborated on this plan in his report. The report states that the European economy should return to a level where it can independently support its own military forces. One of the tasks is to lift the 'dollar shortage'. If Europe's US dollar debt was 3.1 billion in 1949, it would have reached 10.1 billion US dollars in 1959.


By 1958. Most European countries have declared their currencies freely convertible.


In 1964, Japan announced the convertibility of its currency.

After the announcement of the convertibility of major currencies, people clearly realized that the United States could no longer maintain the price of $35 per ounce of gold. Inflation poses a threat to the United States. The Kennedy administration took a series of erroneous actions, including introducing interest rate differential taxes, increasing the costs for foreign borrowers, and implementing voluntary restrictions on foreign loans. Taxation and restrictions provide an opportunity for the emergence of a new market: the Eurodollar market.


1967. The devaluation of the pound dealt a final blow to the illusory stability of the Bretton Woods system.


In the 1960s, the US balance of payments deficit led to a decrease in gold reserves from $18 billion to $11 billion. At the same time, the United States' external debt has increased.


In 1970. The United States has significantly lowered interest rates, causing a major crisis for the US dollar. In a short period of time, a large amount of funds flowed from the United States into Europe with higher interest rates.


May 1971. Germany and the Netherlands announced a temporary free float of their currencies.


August 1971. The growth of the US balance of payments deficit forced President Nixon to suspend the conversion of the US dollar to gold.


December 1971. The final attempt to preserve the Bretton Woods system was made at the meeting of the Smithsonian Institution held in Washington. The deviation between the exchange rate and parity increased to 4.5%.

Maintaining the boundaries of the scope is very difficult. After a period of time, Deutsche Bank intervened with $5 billion in funds. At that time, this was a huge amount of money, but it did not bring success. The foreign exchange exchanges in Europe and Japan had to temporarily close, while the United States announced a 10% depreciation of the US dollar.

Developed countries no longer maintain fixed parity and allow currency fluctuations.


1973-1974. The United States has gradually lifted its interest rate differential tax and voluntary restrictions on foreign loans.

The Bretton Woods system no longer exists.

In the final years of the Bretton Woods system's operation, foreign exchange traders gained significant speculative profits during the period when central bank intervention ceased. After the removal of fixed exchange rates, the opportunity to make such a substantial profit has become very limited. Many banks suffered huge losses, and two famous banks—Bankhouse Hershtadt" in Cologne and "Franklyn National" in New York—even went bankrupt due to failed speculative operations.


In 1976. The Jamaica Conference was held in Kingston. Representatives of leading countries in the world have established new principles for establishing a world monetary system. When making international payments, countries refuse to use gold as funding to fill their balance of payments deficits.

Intergovernmental organizations, as the main components of the new system, regulate currency relations and currency exchange. Use local currency as payment funds. Commercial banks achieve international currency transactions through their main mechanisms.


In 1978. The European Monetary System (EMS) was established. The core of EMS is the interweaving network of currency cross-exchange rates and the central and boundary values of exchange rates. Overall, EMS is very similar to Bretton Woods. If the cross-exchange rate approaches the boundary value, both countries have a responsibility to intervene.

The main currency of the EMS is the German mark.


Since 1985, ECU has gradually become a physical tool rather than a computational tool. Travelers' checks and credit cards named after ECU have been issued, and banks have also begun to accept ECU deposits.


In January 1999, a new European currency emerged on the market to replace the ECU: the euro. Eleven European countries have fixed their exchange rates against the euro. The European Central Bank has begun to manage the European Monetary Union (EMU) through monetary strategies.


In 1999. The euro became the European currency. The following is a list of the exchange rates for 11 participating European countries to exchange for the Euro (EUR).

EMU Countries' Fixed Euro Exchange Rates
EUR/LUF 40.3399 Luxembourg Franc
EUR/BEF 40.3399 Belgian franc
EUR/IEP 0.787564 Irish Pound
EUR/FIM 5.94573 FMK
EUR/PTE 200.482 Escudo Portugal
EUR/ESP 166.386 Peseta
EUR/ITL 1936.27 Italian Lira
EUR/FRF 6.55957 FRENCH FRANC
EUR/DEM 1.95583 German Mark
EUR/NLG 2.20371 Guilder
EUR/ATS 13.7603 Austrian schilling

The euro has issued banknotes with denominations of 5, 10, 20, 50, 100, 200, and 500, as well as coins with denominations of 1, 2 euros, 50, 20, 10, 5, 2, and 1 cent.


In the late 1990s. Personal capital has begun to actively participate in the foreign exchange market.


Disclaimer: This material is for general information purposes only and is not intended as (and should not be considered to be) financial, investment or other advice on which reliance should be placed. No opinion given in the material constitutes a recommendation by EBC or the author that any particular investment, security, transaction or investment strategy is suitable for any specific person.

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