Forex History: The Beginning of a New Era in the Economy

Let's start with an anecdote from 1967 when a Chicago bank refused to give a loan to a university professor named Milton Friedman. The loan was in pounds sterling, and Friedman wanted to use it to take advantage of a drop in the price of the British currency, which he thought would happen within a short time. Friedman then realized that sterling was too expensive against the U.S. dollar, so he intended to sell the currency, buy it back after the price fell and then pay back the money the bank had lent him.

That way, he thought, he could make a quick and easy profit. However, because of the Bretton Woods agreement 20 years ago, the bank denied him the loan. The Bretton Woods agreement fixed the value of currencies against the U.S. dollar and established that the currency would have a value of dollars 35 per ounce of gold.

Purpose of the agreement

The purpose of this agreement, made in 1944, was to establish greater monetary stability internationally to prevent capital flight between countries and at the same time limit currency speculation around the world. This idea was the beginning of the Forex story. Before Bretton Woods, the world economic system was dominated by the gold standard, which was in effect from 1876 until World War One. Under this system, currencies were stable because they were backed by the price of gold, which eliminated the old practice of many rulers arbitrarily reducing the value of their currencies, which inevitably led to inflation.

Disadvantages of the gold standard

Despite its advantages, the gold standard also had serious disadvantages. For example, when an economy was strong, it could increase imports to greatly reduce its gold reserves, thereby increasing the value of its currency. Thus, interest rates rose, the quantity of money or money supply shrank, and overall economic activity fell until a recession hit. At the same time, the prices of goods were kept at a minimum, making them more attractive to other countries, which did not hesitate to make excessive purchases. The gold injected into the country increased the money supply, lowered interest rates, and stimulated the economy.

As long as the gold standard system was in effect, these booms and busts were commonplace and prevailed until the flow of gold and trade was interrupted by the outbreak of World War I. After two world wars, the world's leading economies signed the Bretton Woods Agreement, in which the participants pledged to maintain the value of their currencies within a narrow margin against the U.S. dollar and the corresponding gold rate if required.

The dissolution of the agreement is the beginning of Forex history

The agreement also prohibited countries from devaluing their currencies in order to profit from trade with other countries. Only devaluation of less than 10% was allowed. International trade grew steadily in the decade of the 50's and there was a large movement of capital as a result of the post-war construction industry. This destabilized the exchange rates set by the Bretton Woods agreement.

For this reason, the agreement was finally terminated in 1971, and from that point on, the U.S. dollar could no longer be converted into gold. By 1973, the currencies of the major economies began to trade more freely and were controlled largely by the forces of supply and demand in the speculative market. Combined with the increased volatility, speed and volume of trading in these currencies, the 1970s saw the emergence of new financial instruments, currency liberalization and market deregulation. This is where the history of Forex began.

Thanks to the advent of technology, especially information technology, the cross-border circulation of money accelerated and Forex market activity spread directly to America, Europe and Asia. As a result, the volume of foreign exchange transactions has grown tremendously, from about dollars 70 billion per day in the mid-1980s to more than dollars 2.5 trillion per day in the early 21st century, making the Forex market the most liquid financial market in the world.

The development of the Euro market

The accelerated development of Forex market history, where US dollars are deposited in banks outside the United States, has had a marked impact on the growth of trading volume in the foreign exchange market. Euro markets can thus be defined as markets where assets are placed in currencies other than the currency of origin.

The euro/dollar market originated in the 1950s when the Soviet Union's oil revenues (which were denominated in dollars) were placed outside the United States due to fears that the funds would be frozen by U.S. authorities. As a result, much of the dollar capital abroad was out of the control of the U.S. government. For its part, the U.S. government passed strict laws restricting dollar loans to foreigners in order to limit the outflow of dollars from their countries, which would have been out of their control.

At the time, Euro markets were very attractive to investors because they were less regulated and offered higher yields. In the late 1980s, U.S. companies began borrowing abroad, discovering the euro market as a means of maintaining excess liquidity, financing exports and imports, and providing short-term credit.

London has since become a major offshore trading market, and from the 1980s the city became the nerve center of the euro/dollar market as major British banks began lending in U.S. dollars as an alternative to sterling. By doing so, these banks sought to maintain their position and leadership in global finance. Today's dominance of the Euro market is reinforced by London's geographical position, which allows it to operate simultaneously with the American and Asian markets.

What were the objectives of the Bretton Woods Agreement

Signed in 1944, the Bretton Woods Agreement aimed to stabilize international currencies against the U.S. dollar and gold in order to limit speculation and capital flight between countries. Although the gold standard system provided monetary stability, it was subject to significant economic fluctuations. Strong economies could increase imports, depleting their gold reserves and leading to recessions.

Which led to the abandonment of the Bretton Woods agreement

The growth of international trade and capital movements in the 1950s and 1960s jeopardized the exchange rates set by the agreements. In 1971, U.S. President Richard Nixon abolished the convertibility of the dollar into gold, which eventually led to the abandonment of the Bretton Woods agreement. After 1971, major currencies began to float freely, trading mostly on speculative market depending on supply and demand. This led to the liberalization of currency trading and the birth of Forex market history.

What role technology has played in the development of the foreign exchange market

The advent of information technology has accelerated cross-border exchanges and expanded market activities on a global scale. This has led to an impressive growth in trading volume, making the Forex market the most liquid financial market in the world.

What the Euro market is and how it has affected the foreign exchange market

The Euro market refers to transactions in which assets are placed in a currency other than the currency of origin. Its development, especially in the euro/dollar market, has increased trading volume in the foreign exchange market, offering alternatives to regulation and attractive returns for investors.