Thursday, 16 February 2017

The History Of Forex

The History Of Forex
The history of Forex started from the use/creation of the gold standard monetary system in 1875, this marks as one of the most important history in forex market, To Bretton Woods system 1944 this is where the allied nations deliberated on what would be the system of international monetary management and finally the Jamaica agreement  of  1976 where the world finally accepted the we of floating foreign exchange rate (forex rate).
The creation of the gold standard monetary system in 1875 marks one of the most important event in the history of the forex market. Before the gold standard was implemented, countries would commonly use gold and silver as means of international payment (Forex). The main problem with using gold and sliver for payment is that its value it effected by external demand & supply for example, the discovery of a new gold mine would drive gold prices down.
The main idea of the gold standard was that government guaranteed the conversion of currency into a specific amount of gold and vice versa.  Clearly, government needed a fairly substantial gold reserve in order to meet the demand for currency Exchanges. During the late nineteenth century all of the major economic countries had defined an amount of currency to an ounce of gold. With time, the difference in price of an ounce of gold between two currencies became the Exchange rate for those two countries.
This became the first standardized means of currency exchange in history.
Finally, the gold standard broke down during the beginning of the World War I.
Hence, the Bretton woods, system is where the allied Nation convened to Bretton wood, with more than 700 representatives from the allies in 1944 and they all believed to set up as new monetary system, so as to fill the void left by the gold standard system abandoned, this happened before the end of the world war II. They deliberated over what would be called the Bretton wood system of international monetary management .
Bretton wood led to the formation of the following: A method of Fixed exchange rate; The U.S Dollar replacing the gold standard to become a primary reserve currency and the creation of three international agencies to oversee economic activity; International Bank for reconstruction and Development.
        (IMF) the international monetary fund and (GATT) General agreement on tariff and trade the U.S. Dollar replacing gold as the main standard of world currency convertibility and U.S dollar being only currency backed by gold.
For 25 years or so, the us ran a balance of payment deficit in order to be world reserve currency. By the early 1970s U.S gold reserve were so depleted that the U.S treasury did not have enough gold to cover all the U.S. dollars that foreign Central Bank had in reserve.
Finally, in August 15,1971, U.S. President Richard Nixon closed the gold standard and U.S. now announced the U.S. dollar will not exchange gold as foreign reserve.
Bretton woods did not last but left a legacy that has a significant effect an today international  economic climate, this include the formation of the IMF, IBRD and GATT.
Furthermore, the current exchange rate system came, after the Bretton woods system broken down, then the world finally accepted the use of floating foreign exchange rate during the Jamaica agreement of 1976. This meant that the use of the gold standard would be permanently abolished. However, this is not to say that government adopted a pure free floating exchange rate system. Most governments employ one of the following three exchange rate system that are still used today; which are Dollarization, pegged rate and managed flotation rate.
Finally the international monetary system (Forex) has evolved through three different stages and finally arrived to its current state of floating foreign exchange rate. 

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