Currency exchange dates back to ancient times when merchants exchanged coins from different countries. Silver and gold coins were used and valued according to their weight and size. In the Roman Empire, one government had a monopoly on currency trading. During the Middle Ages, coins of lower value were minted from copper. About 500 years ago, the first currency market was established in Amsterdam. The gold standard currency system introduced itself in 1875. Each currency was backed by gold, and a substantial amount of reserve was needed to meet the demand for money. During World War I, the system collapsed as most countries printed much more money than they had gold. The last hundred years have been crucial in making forex trading what it is today.
Bretton Woods System
In the system called Bretton Woods, which was established in 1944, the gold standard was abandoned and the US dollar was made the world currency. Under this agreement, central banks were to set a fixed exchange rate against the dollar and allow it a 1 percent fluctuation band. The United States owned three-quarters of the world’s gold supply, so the dollar became its replacement. The value of the dollar was set at $35 per ounce. Three institutions were also created to oversee global economic activity: the International Monetary Fund (IMF), the General Agreement on Tariffs and Trade (GATT) (now the World Trade Organization (WTO)), and the International Bank for Reconstruction and Development (part of the World Bank).
Three decades later, under Nixon’s presidency, the Bretton Woods system ended. In 1971, the U.S. suffered from stagflation, meaning it had inflation and recession at the same time. The Smithsonian Agreement of December 1971 allowed a wider fluctuation band for currencies. The dollar was revalued relative to gold at $38 per ounce, causing the dollar to lose value. The agreement allowed other major currencies to fluctuate by 2.25 percent against the U.S. dollar.
Netherlands, Belgium, and Luxembourg in order to reduce dependence and lessen the U.S. dollar. However, it collapsed in 1973. Thereafter, currencies officially moved to the free-floating system, in which exchange rates are determined by supply and demand. The foreign exchange market became an independent entity.
Since the 1990s, it has become more and more demanding. Telecommunication technology and globalization have made it easier for traders to track rates and trade. Currencies can be traded around the clock, five days a week. The foreign exchange market is now OTC and allows large financial institutions as well as other smaller investors and retail investors to participate. The foreign exchange market is the one with the largest trading volume and the most liquidity.
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