History of the Forex Market

History of the Forex Market
Money, in one form or another, has been used by man for
centuries. At first it was mainly gold or silver coins.
Goods were traded versus other goods or against gold. So,
the price of gold got a reference point. But as the trading
of goods grew among nations, moving quantities of gold
around places to settle payments of trade became
cumbersome, risky and time consuming. Therefore, a system
was sought by which the payment of trades could be resolved
in the seller's local currency. But how much of buyer's
local currency should be equal to the seller's local
currency?

The answer was simple. The strength of a country's currency
depended on the amount of gold reserves the country
preserved. So, if country A's gold reserves are double the
gold reserves of country B, country A's currency will be
twice in value when exchanged with the currency of country
B. During the first World War, in order to meet the
tremendous financing needs, paper money was created in
quantities that far exceeded the gold reserves.

After the cease of World War II the western allied powers
tried to resolve the problem at the Bretton Woods
Conference in New Hampshire in 1944. In the first three
weeks of July 1944, delegates from 45 nations gathered at
the United Nations Monetary and Financial Conference in
Bretton Woods, New Hampshire. The delegates gathered to
discuss the postwar recovery of Europe as well as a number
of monetary issues, such as unstable exchange rates and
protectionist trade policies. In the early 1940s, the
United States and Great Britain developed proposals for the
creation of new international financial institutions that
would stabilize exchange rates and promote international
trade.

The delegates at Bretton Woods arrived at an agreement
known as the Bretton Woods Agreement to establish a postwar
international monetary system of convertible currencies,
fixed exchange rates and free trade. To help these
objectives, the agreement created two international
institutions: the International Monetary Fund (IMF) and the
International Bank for Reconstruction and Development (the
World Bank). The aim was to render economic aid for
reconstruction of postwar Europe. An initial loan of $250
million to France in 1947 was the World Bank's first act.

Under the Bretton Woods Exchange System, the currencies of
active nations could be changed into the US dollar at a
fixed rate, and foreign central banks could change the US
dollar into gold at a fixed rate. It was similar to forex
trading.

The United States, under President Nixon, retaliated in
1971 by devaluing the dollar and pushing realignment of
currencies with the dollar. The heading European economies
tried to counter the US move by adjusting their currencies
in narrow band and then float jointly against the US dollar.

Fortunately, this currency war did not last long and by the
first half of the 1970's heading world economies gave up
the fixed exchange rate system for good and floated their
currencies in the exposed market. The idea was to let the
market determine the value of a given currency based on the
demand and supply of the currency and the economic wellness
of the currency's nation, it sown the forex trading. This
market is popularly known as the International Monetary
Market or IMM. This IMM is not a single entity. It is the
collection of all financial institutions that have any
concern in foreign currencies, all over the world. Banks,
Brokerages, Fund Managers, Government Central Banks and
sometimes individuals, are just a few examples.

Although the currency's value is dependent on the market
forces, the central banks still try to keep their currency
in a predefined (and highly confidential) fluctuation band
as a part of their forex trading strategies. They achieve
this by taking several steps.

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Andrew Daigle is the owner and author of many successful
websites including a free forex training website called
ForexBoost at http://www.ForexBoost.com and a forex blog
http://forex-trading-system.typepad.com to learn forex
trading systems and strategies.