forex history

Man has used money, in one form or another, for centuries. At first, civilizations used mainly gold and silver to transact with one another. Goods were traded against other goods or against gold. As a result, the price of gold became a reference point. As the trading of goods grew between nations, moving quantities of gold around locations to settle payments of trade became cumbersome, risky and time consuming. Therefore, a system was sought by which the payment of trades could be settled in the seller's local currency. But how much of the 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 maintained. So, if country A's gold reserves are double the gold reserves of country B, country A's currency would be twice in value when exchanged with the currency of country B. This became to be known as The Gold Standard. Around 1880, The Gold Standard was accepted and used worldwide.During the first WORLD WAR, in order to fulfill enormous financing needs, paper money was printed in quantities that far exceeded the gold reserves. The currencies lost their standard parities and caused a gross distortion in the country's standing in terms of its foreign liabilities and assets.After the end of the second WORLD WAR the western allied powers attempted to solve the problem at the Bretton Woods Conference in New Hampshire in 1944. The conference resulted in the creation of:The World BankInternational Monetary Fund (IMF), andBretton Woods Exchange SystemThe World Bank and the International Monetary Fund are collectively known as the Bretton Woods Institutions. Under the Bretton Woods Exchange System, the currencies of participating nations could be converted into the US dollar at a fixed rate, and foreign central banks could convert the US dollar into gold at a fixed rate. In other words, the US dollar replaced the then dominant British Pound and the parities of the world's leading currencies were pegged against the US Dollar.However, this fixed exchange rate system allowed any country to devalue or revalue its currency to fulfill the local financial and economic needs, particularly to make their exports more competitive in the global market. The massive US balance of payments deficits of early 1960's began casting shadows of doubt in the strength of the US dollar. During the same decade, the currency crisis in Europe, mainly in the United Kingdom, France and Germany brought about the end of the Bretton Woods accord.The United States, under president Nixon, retaliated in 1971 by devaluing the dollar and forcing realignment of currencies with the dollar. The leading European economies tried to counter the US move by aligning their currencies in narrow band and then float them collectively against the US dollar.Fortunately, this currency war did not last long and by the first half of the 1970's leading world economies gave up the fixed exchange rate system for good and floated their currencies in the open market. The idea was to let the market decide the value of a given currency based on the demand and supply of the currency and the economic health of the currency's nation. This market is popularly known as the International Monetary Market or IMM. This IMM is not a single entity. It is a collection of all financial institutions that have any interest in foreign currencies all over the world. Banks, Brokerages, Fund Managers, Government Central Banks and sometimes individuals are just a few examples of these institutions. This is very much the present system of the exchange of foreign currencies. 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.