Forex History

Forex origin is associated with a number of historical events, which occurred in the 20th century. Several dozens of states with a capitalistic system came to an agreement and created Forex, a Forex market. Later the number of countries changed.

The emergence of Forex is the natural result of the evolution of the global economic system. It is a financial instrument that is served not by individual dealers but by dozens of Governments. To be sure of this, lawyers from the Regulated United Europe would like to make a short excursion into history and trace all the prerequisites of the emergence of Forex—from the first currencies to the present.

What does Forex mean (Forex)

Forex (from English. Foreign Exchange – «foreign exchange») is the global market of interbank currency exchange at free prices.

In a narrower sense, Forex can be called a tool for speculative currency trading through liquidity providers and brokers/dealing centers.

In aggregate, according to the definition of Forex – a market with the presence of interbank exchange and currency transactions at free prices.

In other words, Forex is a mechanism of free purchase and sale of currencies. The participants of it trade the currency pairs: they buy for one currency for another, expecting to win on the exchange rate difference. The first currency in the pair is called base, and the second one quoted.

All trade takes place on special platforms, where the instruments of control are not public, but market.

The history of the Forex market is an example of a long and arduous way from a forced measure to rescue the global economy from collapse to online platforms of investment and earnings.

The Forex market operates 24 hours a day and usually is divided into four sessions:

1. Sydney
2. Tokyo
3. London
4. New York

Forex Trading Hours:

• New York from 13:00 to 22:00 GMT
• London from 08:00 – 17:00 GMT
• Tokyo: from 00:00 till 09:00 GMT
• Sydney: from 22:00 till 07:00 GMT

Considering the time difference, there is a period of time when sessions partially coincide. Because of the almost nonstop work, Forex is more active than the stock market, and trading cannot be restricted by one exchange schedule.

Forex Market Founders

The birth of the Forex market was a result of many historical processes; that is why it cannot be said that the origin of Forex is connected with a specific founder. One name, however, is the 37th President of the United States, Richard Nixon.

Nixon decided to abolish the gold standard or turn the dollar into gold. It is with his decision that the history of the development of the Forex market as an independent platform has begun.

With the Smithsonian Agreement on August 15, 1971, the free conversion of the dollar into gold was abolished. Because of these events, exchange rates of all currencies stopped being stable and went onto a free float. So, currency trading was born. The exchange rate depended no longer on its gold equivalent.

Everything was dictated by the real market demand of the given currency. To make this currency exchange completely legal and transparent, the separate currency market «Forex» was created.

The conclusion of the Smithsonian Agreement, which had laid down the possibility of quotations of up to 4.5% for pairs with the dollar and up to 9% without the dollar, made the Bretton Woods currency system cease being relevant. Jamaica replaced the post-war system.

When the fluctuation of gold and currencies started, the trade of currency type began, as dependence on demand appeared. The latter was driven by the economic performance of countries mainly. It happens that the more stable the growth of economy is, the higher the quotes on national money are.

The deficiencies of the Jamaican system were cured in 1975 by two individuals: German Chancellor Helmut Schmidt and French President Giscard d’Estaing.

They invited the heads of a number of economically advanced countries to discuss issues through the summit. After a few summits, notably in Rambouillet, they worked out a new international currency system. Under this system, the currency exchange should be regulated by the currency market or Forex.

History of Forex market development

Forex is the financial market that has undergone most changes in history.

Whereas prior to the 1990s only large financial institutions had access to the currency market, it was now open to all investors.

In this decentralized electronic market, world currencies are traded 24 hours a day. And its history begins with the appearance of the first money.

Currency transactions in ancient times

Before the Middle Ages, money was barely used outside of the individual kingdoms. But already in the X century, active trade began not only between the individual countries of Europe but also between continents. Cultures and therefore the currencies began to meet. There was a need for an equivalent exchange. From this moment begins the history of the emergence of Forex as a concept. Due to the need for facilitating payments across countries, exchange charters were invented in Florence as far back as 1291. An exchange rate and even an interest rate was established which allowed private bankers like the Medici family to operate.

Back in those times in Italy, around that time, Monte dei Paschi was founded – the oldest bank in the world. This bank existed exclusively to perform foreign exchange deals.

Creation of financial markets in Europe

The history of the currency relationships is connected with a few significant events in the 16th century. In particular, Amsterdam created the first European currency market. The freedom of trading money helped to stabilize the European national currencies. So after Amsterdam, the bidding started all over Europe.

By this time, the currency market started to receive its modern form. The exchange rates depended on the trade balance of the countries, and thereby, there appeared the first traders, which earned on the exchange rate difference.

The first legislative restrictions appeared in 1572. Holders of the exchange certificates stopped working directly with the exchanges and began using special brokers for this purpose. The stated ones are prototypes of the modern brokers.

History of development of Forex market in the modern era

Up to the XIX century, there was no unified currency. The good position was taken by the British pound – many foreign banks settled in England, which became the first financial center of the world. Consequently, on the Old World exchanges were carried out basically in British pounds. However, reliable reserve currency still is considered gold.

Actually, all the currencies were turned into gold. Every Central Bank is bound to provide convertibility of its currency in the forms of gold. Later on, it was known as the «Golden Standard». Considering the relatively small amount of money, being connected with gold could give an excellent result. Between the years 1879 and 1914, the fluctuations of exchange rates had remained practically stable, despite their existence.

World War I put an end to the gold standard

Large amounts of money were spent by the countries to finance the war, and they began to print more money than provided by their foreign reserves. Inflation then began growing at a very explosive rate, and countries were then forced to suspend the convertibility of their currencies into gold. History repeated once again and in 1925 the United Kingdom once more adopted the gold standard.

The government in Albion resorted to tight monetary policies, in order to return to pre-war parity. This leads to an appreciation of the pound against gold, and subsequently, deflation sets in with growth of the UK economy. Further, restoration of gold standard was soon emulated by success in the neighbourhood, and France restored the gold standard in 1928, after recovering from the war, the world economy resumed rapid growth, once more exposing deficiencies of the currency peg against gold.

Without gold, another huge release of money supply triggered an economic crisis in 1929, and the system of gold standard collapsed once more.

In 1931, the United Kingdom, Germany and Japan abandoned the gold standard. In 1933, the United States took this step – depreciating the dollar against gold by 40%. France renounced the convertibility of the franc into gold in 1936. The world was once more split into independent monetary units.

The Bretton Woods Agreements and the International Monetary System

The very history of the establishment of the Forex market in its present form starts in the eve of the end of the Second World War.
In the summer 1944 more than seven hundred representatives of anti-German coalition have gathered in the USA town Bretton Woods. As a result of the conference taken place there it was:
Exchange rates were fixed;
Reserve currency – US dollar, which has changed the gold standard;
Three organizations would be established to maintain records for international economic and financial relationships.

The Bretton Woods agreements were adopted and joined by 44 countries.

This is the first international monetary system. It was bestowed with the mission of controlling exchange rate fluctuations and restoring economic stability. The agreement laid down in particular that only the dollar could be converted into gold at a fixed rate of $35 per ounce.

It held at that time 75% of the world’s gold reserves. The dollar becomes a world reserve currency, and the exchange rates of other currencies are fixed and pegged to the dollar. An ad hoc organization, the International Monetary Fund, was established in 1947 to regulate the new system.

Other results of the Bretton Woods agreement have also been to formulate the IMF, or International Monetary Fund, and to initiate the creation and organization of both the World Bank and the WTO.

As a result, this system led to the depleting of American gold reserves, which could not provide reserve funds to foreign states. Given this situation, on 15 September 1971 Richard Nixon gave a decree on ending the exchange of the dollar for gold.

Free currency market born

Yet, this was not to be the case for a very long period of time. The money supply grew with this increase in domestic spending and thus created problems for the US dollar. Specifically, by the early 1970s, the US Treasury was short on its gold reserves to back all those dollars foreign central banks held in reserve.

Finally, on August 15, 1971, the US President Richard Nixon finally broke with the gold standard, announcing to the world that a change had come and the United States would no longer exchange gold for dollars.

It was documented in the form of the so-called Smithsonian Treaty. Thus began the recent history of the Forex currency market.

The Basel Treaty in 1972 established the European Currency Snake, an agreement which outlines co-operation for EU members to manage currency fluctuations of these countries in relation to one another.

In 1973, the international currency system switched to a floating exchange rate. From here on, the Forex market has gradually evolved as we know it.

The Bretton Woods monetary system collapsed, and in January 1976, Jamaica finalized the last conditions for transitioning into a modern international monetary system where the exchange rates were determined by market demand rather than by the State.

The currency market has been liberalized. No longer was there a regulation in place regarding the exchange rates between currencies; gold was no longer a reserve and countries could introduce a floating exchange rate system. To date, three types of exchange rate systems have evolved:

In 1979, European Monetary System was established where a common monetary standard was established which was the predecessor of EURO. There was an agreement that central banks committed themselves to maintaining their exchange rates within +/- 2.5 per cent of the central exchange rate.

One of the most significant moments in the history of the currency market is the devaluation of the dollar, which happened in the year of 1985 under pressure from that so-called group of five: the US, Japan, Germany, the UK, and France.

In 1985, finance ministers and central bank presidents of the most advanced economies – France, Germany, Japan, the United Kingdom and the United States – met in New York to work out an agreement that would improve the economic efficiency of currency markets.

In the hotel «Plaza», at that conference, certain changes concerning the economies of separate countries and the world economy in general were approved.

The most relevant consequence of the “agreements in the Plaza” is that he entrusted into the hands of central banks the right to regulate the process of exchange rates.

1. On one hand, exchange rates further have been determined by law, mainly by market demand and supply.
2. On the other hand, central banks have managed to guide the “invisible hand of the market” for the purpose of preventing the destabilization of global markets.

Evolution of Forex and entry into the market of retail investors

In 1990, capital flows between countries increased thanks to new technologies. The Forex market, which was previously limited to large financial institutions, has become available to individual traders and investors who have been given a tool for currency speculation.

In 1992, the world witnessed several crises related to currency speculation. Black Wednesday (1992) is the best example.

Billionaire George Soros opened a short position of £10 billion, betting on the fall of this currency. The Bank of England was forced to remove the pound from the European monetary system. George Soros’ personal profit from this deal was estimated at one billion dollars.

Since 1995, traders have been able to trade currencies in real time via the Internet. And in 2002, the explosive growth of currency trading began.

Nowadays, Forex is the largest financial market in the world according to daily volumes of operations; its daily turnover is estimated at more than 5.1 trillion dollars.

Forex today

Nowadays, Forex is an international currency trading decentralized market. With each passing year, the entry threshold becomes lower. If previously one needed to count either on his knowledge and skills only, or to entrust trading to professional management, now a trader can do the same with the assistance of automatic trading advisers, AI, and networks.

This is all a result of increased ease of market entry, largely caused by the growing number of currency trading platforms and services. First of all, there are technological advances that reduced the cost of trade, increased the speed of transactions and more transparency opened hashes, public digital archives, etc.

Legal status and protection

Along with technical developments, the legislative platform is also being perfected. Since the beginning of the last decade, a variety of regulatory curbs for Forex – especially by European regulators – have been developed.

The regulators in particular introduced greater controls to maintain the integrity of the relationship between broker and trader. Thus, one more penalty system has been introduced.

Today, Forex brokers are bound to ensure that their clients’ finances are protected, they must adhere to certain specific procedures in efforts to attempt to curtail money laundering, and must carry out correct and accurate execution of client orders.

Conclusion

Forex is nowadays the largest financial market in the world. This is a very volatile trading tool, and such unique features as the presence of credit leverage and the ability to work 24 hours 5 days a week make it very attractive for investment.

If you want to get a Forex license and register your own platform, our team from Regulated United Europe will be happy to assist you in registering the company and applying for a license in the most friendly for this jurisdiction. Thanks to experienced legal advisers, tax experts and accountants, the process of obtaining a Forex license will not be simple and transparent for you. You can now contact us for individual consultation and start your project right away.