FOREX History

FOREX, as most people know it today, came into existence in 1971 with the end of the Bretton Woods Agreement. The Bretton Woods Agreement fixed national currencies against the dollar, and set the dollar at a rate of 35 dollars per ounce of gold. The Bretton Woods Agreement was aimed at creating international monetary stability by preventing money from fleeing across nations and by restricting speculation in the world currencies.

The gold exchange standard had prevailed between 1876 and World War II, dominating the international economic system. Under the gold exchange, currencies entered a new phase of stability as they were backed by the price of gold. It abolished the age-old practice used by kings and rulers of arbitrarily devaluing money and triggering inflation. But the gold exchange standard didn't lack faults. As an economy strengthened, it would import heavily until it ran down the gold reserves required to back its money. As a result, the money supply would shrink, interest rates would rise and economic activity would slow to the point of recession. Ultimately, prices of goods would hit bottom, appearing attractive to other nations. This would create buying sprees that injected the economy with gold until it increased its money supply, thus driving down interest rates and recreating wealth in the economy. Such boom-bust patterns prevailed throughout the duration of the gold standard until the outbreak of World War II, which interrupted trade flows and the free movement of gold.

Under the Bretton Woods Agreement, founded at the end of World War II, participating countries agreed to try to maintain the value of their currency with a narrow margin against the dollar and a corresponding rate of gold as needed. Countries were prohibited from devaluing their currencies to their trade advantage and were only allowed to do so for de-valuations of less than 10%. In the 1950s, the ever-expanding volume of international trade led to massive movements of capital generated by post-war construction which destabilized currency rates as setup in Bretton Woods. The Agreement was abandoned in 1971, and the US dollar would no longer be convertible into gold.

By 1973, the resulting free-floating currencies of major industrialized nations were controlled mainly by the forces of supply and demand which acted in FOREX. Prices were floated daily with volume, speed and price volatility, all increasing throughout the 1970s. This created new financial instruments, market deregulation and trade liberalization. In the 1980s, cross-border capital movements accelerated with the advent of computers and technology extended market continuum through Asian, European, and American time zones. Transactions in FOREX rocketed from about 1 billion dollars a day in the 1980s to around 2 trillion dollars a day two decades later. Even though around 2 trillion dollars a day is currently being traded, only 7% of this done by individual investors. The majority of trading occurs between approximately 300 of the worlds largest banks, central national banks and large corporations. With such rapid growth and the ability to create outstanding gains while tying up relatively small amounts of capital, FOREX is becoming a greater investment tool for the individual. Today, the main obstacle for the individual investor is a lack of information about FOREX. Once the information barriers are broken down, investing in FOREX will become just as common, if not more so, than investing in the stock market.