Forex History

The origin of Forex is associated with a number of historical events that occurred in the 20th century. The Forex market was created by agreement of several dozens of states with a capitalist system. Later, the number of countries changed.

The emergence of Forex is a 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 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 simple terms, Forex is a tool for the free purchase and sale of currencies. Participants trade currency pairs, buying one currency for another, hoping to win on the exchange rate difference. The first currency in the pair is called base, and the second – 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 for investment and earnings.

The Forex market is open 24 hours a day and is usually 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 – 09:00 GMT
• Sydney from 22:00 – 07:00 GMT

Given the time difference, there are hours when sessions overlap. Due to almost continuous work, Forex is more active than the stock market, and trading is not limited to the schedule of one exchange.

Forex Market Founders

The birth of the Forex market is the result of many historical processes. Therefore, it can not 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 convert the dollar into gold. It was with his decision that the history of the development of the Forex market as an independent platform began.

On August 15, 1971, the Smithsonian Agreement abolished the free conversion of the dollar into gold. As a result of these events, the exchange rates of all currencies ceased to be stable and went on a free float. Thus, currency trading was born. The exchange rate was no longer dependent on the gold equivalent.

The real market demand for a particular currency determined everything. To make the currency exchange completely legal and transparent, a separate currency market «Forex» (foreign exchange market) was created.

With the conclusion of the Smithsonian Agreement, which established the possibility of quotations of up to 4.5% for pairs with the dollar and up to 9% without the dollar, the Bretton Woods currency system is no longer relevant. The post-World War II system was replaced by Jamaica.

After the beginning of the fluctuation of the gold and currencies there was a trade of the currency type, as dependence on demand appeared. This demand was mainly driven by the economic performance of countries. It turns out that the more stable the growth of the economy, the higher the quotes on national money.

The Jamaican system had shortcomings that two people decided to remedy in 1975: 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 several summits, notably in Rambouillet, delegations worked out a new international currency system. Under this system, currency exchange should be regulated by the currency market or Forex.

Forex market development history

Forex is one of the financial markets that has changed the most 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 rarely used outside individual kingdoms. But already in the X century active trade began not only between individual countries of Europe, but also between continents. Cultures and therefore 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. In order to facilitate payments between countries, in 1291, Florence created exchange charters. They set exchange rates and interest rates, allowing private bankers such as the Medici family to operate.

Around that time in Italy Monte dei Paschi – the oldest bank in the world. Its sole purpose was to facilitate foreign exchange transactions.

Emerging financial markets in Europe

In the 16th century, the history of currency relationships is associated with several important events. In particular, Amsterdam created the first European currency market. The ability to trade money freely helped to stabilize European national currencies. So after Amsterdam, the bidding started all over Europe.

At that time, the currency market began to take its modern shape. Exchange rates varied depending on the trade balance of countries, resulting in the first traders to earn on the exchange rate difference.

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

History of Forex market development in the modern era

Until the 19th century, there was no single currency. The British pound held a good position – many foreign banks settled in England, which became the world’s first financial center. Therefore, in the Old World, exchanges were conducted mainly in British pounds. However, the most reliable reserve currency is still considered gold.

In fact, all currencies are converted into gold. Each central bank is obliged to ensure the convertibility of its currency into gold reserves. This was later called the «Golden Standard». Given the relatively small amount of money, the link to gold gave a good result. Exchange rates fluctuated between 1879 and 1914, but remained generally stable.

World War I ended the gold standard

Countries spent large sums of money to finance the war, and began printing more money than their foreign reserves provided. Inflation grew at an explosive rate, and eventually countries were forced to suspend the convertibility of their currencies into gold. But history repeated itself and in 1925 the United Kingdom again adopted the gold standard.

The Albion government adopted tight monetary policies to return to pre-war parity. The appreciation of the pound against gold leads to deflation of the UK economy and subsequent growth. Inspired by the success of its neighbors, the gold standard was soon restored by France (1928). After recovering from the war, the world economy began to grow rapidly, again revealing the shortcomings of the currency peg to gold.

The release of a huge money supply without gold caused another economic crisis in 1929, and the gold standard system collapsed again.

In 1931, the gold standard was abandoned by the United Kingdom, Germany and Japan. In 1933, the United States did this, depreciating the dollar by 40% compared to gold. France renounced the convertibility of the franc into gold in 1936. The world was again divided into independent monetary units.

The Bretton Woods Agreements and the International Monetary System

The history of the creation of the Forex market in its modern form begins on the eve of the end of the Second World War.

In the summer of 1944, the US town of Bretton Woods gathered more than seven hundred representatives of the anti-German coalition. The conference resulted in:

• Exchange rates were fixed;
• Reserve currency – US dollar, which has changed the gold standard;
• The establishment of three organizations to monitor international economic and financial relations.

The Bretton Woods agreements have been adopted, with 44 countries participating.

This was the first international monetary system. Its mission is to control exchange rate fluctuations and restore economic stability. In particular, the agreement provided that only the dollar could be converted to gold at a fixed rate of $35 per ounce.

At that time, the United States held 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.

The effects of the Bretton Woods agreement have also been the development of the IMF (International Monetary Fund) and the beginning of the formation of the World Bank and WTO.

The system led to the depletion of American gold reserves, which made it impossible to provide reserve funds to foreign states. To address this issue, Richard Nixon issued a decree on 15 September 1971 to end the exchange of the dollar for gold.

Free currency market born

However, the idyll did not last long. The growth of domestic spending and the consequent increase in the money supply caused problems for the US dollar.

By the early 1970s, the US Treasury had insufficient gold reserves to cover all the dollars that foreign central banks held in reserve.

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

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

In 1972, the Basel Treaty established the European Currency Snake (European Currency Snake), an agreement to coordinate the actions of EU member states in managing the currency fluctuations of these countries relative to each other.

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

The Bretton Woods monetary system collapsed and, in January 1976, Jamaica finalized the final conditions for a transition to a modern international monetary system in which exchange rates are set by market demand rather than by the State (Jamaica Monetary System).

The currency market has become liberalized. There were no more rules governing exchange rates between currencies; gold lost its reserve status and countries could adopt a floating exchange rate system. Three exchange rate systems emerged:

• Dollarization: when a country decides to use another country’s currency instead of its own.
• Stable exchange rate: a country decides to peg its currency to another currency on a permanent basis.
• Variable rate: the exchange rate fluctuates freely according to market demand and supply.

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

An important moment in the history of the currency market is the dollar devaluation in 1985 under the pressure of the 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.

At the meeting at the hotel «Plaza» were approved some changes concerning the economies of individual countries, as well as the world economy as a whole.

The most important outcome of the «agreements in the Plaza» is that he has assigned to the central banks the power to regulate exchange rates.

1. On the one hand, exchange rates continued to be determined mainly by market demand and supply.
2. But on the other hand, the central banks have been able to direct the «invisible hand of the market» to prevent global market destabilization.

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.

Currently, Forex is the largest financial market in the world, in terms of daily volume of transactions with a daily turnover of more than 5.1 trillion dollars.

Forex today

Today Forex is a global decentralized market for currency trading. Every year the threshold for entry is decreasing. If previously it was necessary to rely only on their knowledge and skills or resort to professional management, today a trader can trust automatic trading advisers, AI, networks.

The increased ease of entering the market is largely due to the growing number of platforms and services for currency trading. First of all, these are technological advancements that have reduced trade costs, increased transaction speed and increased transparency (opening hashes, public digital archives, etc.).

Legal status and protection

In parallel with technical improvements, the legislative framework is improving. Over the last 10 years, various regulatory restrictions have been developed for Forex, especially by European authorities.

In particular, regulators have introduced stricter measures to ensure the integrity of transactions between broker and trader. A system of penalties has been introduced.

Today, Forex brokers are obliged to guarantee the safety of client funds, to follow strict procedures to combat money laundering and to ensure accurate execution of client orders.

Conclusion

Forex is the largest financial market in the world. This is a very volatile trading instrument, and such unique characteristics as the presence of a credit leverage and 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. Contact us now to schedule an individual consultation and start your project today.