Forex History

Before World War I, the monetary functions were performed by the so-called "gold standard" or simply by gold. Paper money was merely representing gold in everyday payments and could be easily exchanged for real gold (its amount was indicated on every paper monetary unit). That is why no problems with setting the currency rate could arise as rates were based on existing gold parity. The mechanism of gold points could work only when the gold was freely traded at a fixed price without any limits for exporting gold. This situation had been taking place in reality until WWI. Not surprisingly that "Golden Age" (1870-1914), which was characterized as the period of "highly unrestrained capitalism", was accompanied by fixed rates of currencies.

World War I triggered inflation which, in its turn, made it impossible to support currency exchange by gold. The "gold standard" collapsed. Though an attempt to revive the modified gold standard was made in the 1920s, the world economic crisis of 1929-1933 buried all hopes for this scheme. In 1931 Great Britain decided to stop "adjusting" its pound to gold. This started the period of devaluations, continuous corrections in currency parity, creation of import restrictions and provision of severe control over currencies.

Bretton Woods exchange system (created in 1944) was aimed at combining fixing features of the gold standard and flexible features of the system with floating currency rates. All party-countries agreed to set fixed official gold content for their national currencies and define the parity between currencies on the basis of the rates. However, the obligation to exchange paper money for gold was canceled, and the mechanism of gold points could not work. To solve this problem the party-countries of Bretton Woods agreement decided to protect currency rates from "getting out" of parity limits to the size of +/- 1%. The payment balances should be adjusted automatically through changing the revenue and prices, initially determined by changes in exchange reserves. The parity could be changed only in cases of "fundamental (i.e. terrific) economic misbalances".

The 1960s revealed weak points of this system under growing inflation. Inflation growth and local divergences in this growth inside each country turned into continuous parity adjustments. Though Bretton Woods is often used as an example of systems with fixed currency rates, more than 109 countries changed their national currency rates during the period from 1948 up to 1967. The average currency devaluation was 48.2%. About 48 countries made two or even more devaluations of their currencies.

In the same 1960s, inflation whirlpool came to the USA. The market price for gold exceeded the fixed price, and the United States no longer could support this price artificially. On August 15, 1971, US President Nixon liquidated the existing correlation between gold and dollar with a single signature on the document: American currency lost its support. In December 1971 the dollar went through devaluation process (for the first time since World War II, but not for the last time as the history will show). Since March 1973 the system of floating currency rates has been predominating.

The new currency system, including usage of floating rates, was officially approved by agreements of Jamaica Conference.

This system found its representation in the Statue of IMF: no gold adjustments for the currencies should be made. For the same reason no longer any fixed currency correlations on the basis of gold parity could ever exist. In this way, the Jamaica exchange system substituted the Bretton Woods system in 1976.

Finally, the world inter-bank currency market got its modern shape (nowadays known as Foreign Exchange Operations, Forex for short), and since this market has become famous for its exclusive dynamics and liquidity. This is the only market working all day long - 24 straight. Fast money transfers, low transaction costs, and high liquidity make Forex one of the most attractive and affordable markets for investors in the whole world.