Foreign Exchange History
Foreign exchange history can be traced back to the middle ages when international merchant banker used the system of using bills of exchange. These bills of exchange represented transferable third-party payments, which facilitated both flexibility and growth in the trades that included foreign exchange. During those days, coins were initially minted from the preferred metal and in stable political regimes, the introduction of a paper form of governmental I.O.U. during the middle ages also gained acceptance. Read on to know more about the origin of foreign exchange.
In the history of foreign exchange before World War I, most central banks supported their currencies with convertibility to gold. Under the gold standard, currencies gained a new phase of stability as they were backed by the price of gold. However, the gold exchange standard had its weaknesses of boom bust patterns. The combination of a greater supply of paper money without the gold to cover led to devastating inflation and resulting political instability. To protect local national interests, foreign exchange controls were increasingly introduced to prevent market forces from punishing monetary irresponsibility. Know more about the foreign exchange history.
At the end of the World War II, Bretton Woods Agreement was formed in order stabilize and determine the international foreign exchange market. This agreement, fixed national currencies against the dollar, and stick in the dollar at a rate of USD 35 per ounce of gold. With this, dollar has gained a premium currency position, reflecting the shift in the global economic dominance to many countries. Many countries were not permitted to devaluate their currencies to their trade advantage. They were only allowed devaluations of less than 10%.
Many nations’ economy has suffered because of the World War II. However, with the collapse of Bretton Woods in 1971, US dollar became no longer be exchangeable into gold. By 1973, currencies of important industrialized nations became largely free floating, mainly controlled by the forces of supply and demand which acted in the foreign exchange market. With the advancement of technology and computers in the 1980s, cross-border capital movements accelerated and extend market continuum through European, Asian and American time zones. Transactions in currency exchange increased intensively from nearly $70 billion a day in the 1980s, to more than $1.5 trillion a day two decades later.