A quote by Pearl Buck goes, "If you want to understand today, you have to search yesterday." Understanding the forex trading systems of today will become easier if you understand the history of forex. Provided below, are interesting collection of events that has led us to where we are now in forex trading.
A need for improved product quality and quantity warranted division of labor based on economic specialization. Inequality in labor led to economic interdependence, because one member required the product or service offered by the other. The buyer had to pay for the product purchased. In a pre-monetary economy, The Barter Trading System came in to being. The number of units exchanged, goods for goods, differed versus products exchanged.
Increase in wants, lack of a standard value, lack of store value, and incapability to divide commodities to pay exactly for the value purchased were common defects in the Barter Trading System.
With time, the modern economic system, using money as a trading tool, came in to being. Money contributed to prevent the 4 major defects in barter. Money provided all the necessary elements to pay the exact value, in terms of medium, measure, standard, and storage.
As trade flourished between nations, a standard that would determine the value of every national currency became important. Since currencies represented the economic value of the national currency, per unit of international currencies were not at par in value with other currencies. Difference existed in the exchange value for currencies.
Gold and silver used to pay for international trade, was not appropriate. A more standard system of trading was required. A new gold or silver mine discovered in a nation would provide vast supply of the commodity leading to decreasing price of gold or silver.
The Gold Standard System was the first ever standardization adopted in the history of forex trading. The Gold Standard Monetary System of 1875 is an assurance where nations promised to convert the currency to specific amount of gold, and vice-versa. The gold reserve of the national economy supported the national currency. Nations defined the value of their currency in terms of an ounce of gold. The difference between the currency units to buy an ounce of gold was the then exchange rate.
The onset of world wars warranted a need for the European nations to expand their military. Per Gold Standard System, nations were not supposed to print more value of currencies than what their gold reserves support. Nations did not have sufficient gold to back their currencies. The same situation hampered several countries in the inter-war years. Several nations stopped following the Gold Standard System due to inconvenience.
In 1944, the Bretton Woods System for international money management came in to being. The major international agencies comprising of International Monetary Fund (IMF), International Bank for Reconstruction and Development (IBRD), and the General Agreement on Tariffs and Trade (GATT) was set up to monitor global economies. USD became the standard primary reserve currency. The fixed exchange rate system came in to being. In later years, the depletion of gold reserves in the US put an end to the Bretton Woods system and the fixed exchange rate system. Floating foreign exchange rates came in to being.
Pure floating rates was not followed by all nations; dollarization of economies, pegged rates for national currencies, and managed floating rates were used in the trading processes by different nations as forex trading modes. These systems are still in use.
The forex trading policies adopted by different nations today is by the decisions of their major market participants.
Government and central banks, banks and other financial Institutions, hedgers and speculators are the major market participants representing the trading mob of any nation. The overall comfort zone and profitability of these trading participants is the gauge to determine the exchange rate system for the nation.
Considering the high rate of volatility in the global market periodically, market participants decide trading styles. With forex having gone online, trends are highly volatile to date. It is participant economy. Big financial changes can be up any moment.
