Forex Market History
Before 1971, the Bretton Woods Agreement prohibited speculation in the currency markets. The Bretton Woods Agreement was introduced in 1945 with the purpose of stabilizing international currencies and protecting from money fleeing across nations. This agreement determined all national currencies against the dollar at a fixed price, and set the dollar at a rate of $35 per ounce of gold. Before this agreement, the Gold Exchange Standard was in place since 1876. The Gold Standard used gold to back each currency this way preventing rulers from arbitrarily debasing money and causing inflation.
However, the Gold Standard had its own disadvantages. Economy’s gold reserves would be run down due to imported goods from abroad. As a consequence, the country’s money supply would decrease resulting in interest rates increasing and a worsening of economic activity which finally led to recession.
Finally, recession caused prices of goods to drop so that they appeared more attractive to other countries. This eventually led to an inflow of gold back into the economy and an increase in money supply which led to the decrease of interest rates and wealthier economy. These patterns prevailed throughout the world during the Gold Exchange Standard years until the beginning of World War I, which interrupted the free flow of trade and the movement of gold.
After the war, the Bretton Woods Agreement was introduced, when participating countries came to agree to keep the value of a national currency with a small margin against the dollar. A fixed rate was also used to value the dollar in relation to gold. Countries were not allowed to devalue their currency by more than 10%. After the World War II, international trade expanded rapidly due to the post-war construction and this resulted in substantial capital movements. This led to destabilization of exchange rates that had been implemented by the Bretton Woods Agreement.
The agreement was eventually abolished in 1971, and the dollar was not any more convertible to gold. By 1973, currencies of major countries were floating more freely against each other. Prices were set, with volumes, speed and price volatility, all increasing during the 1970s. This created new financial instruments, market deregulation, and open trade. It also increased the power of speculators.
In 1980s, the money movement across borders increased with the development of computer systems. The market became a continuum, trading through the Asian, European and American time zones. Large financial corporations emerged with their own dealing rooms with hundreds of millions of dollars, pounds, Euros and yen being exchanged in just minutes. Today the market has changed significantly and international financial transactions are carried out to speculate on the market with ultimate goal to make money out of money.
London appeared to become the world’s leading international financial center. It is the world’s largest currency market. This is not only due to its location, operating during the Asian and American markets, but also due to the creation of the Eurodollar market. The Eurodollar market was created during the 1950s when Russia’s oil profits, all in US dollars, was decided to be deposited outside the US in fear of being frozen by US Government. This triggered a large quantity of US dollars to leave outside of the US. These huge cash reserves were very attractive to foreign investors as they had far less regulations and offered higher yields.
The FX market is considered an Over-the-Counter (OTC) or ‘interbank’ market, due to the fact that transactions are conducted between two counterparts over the telephone or via an electronic network. Trading is not centralized on an exchange, as with the stock and futures markets. Core Liquidity Markets allows you the option to choose your leverage from 1:50 up to 1:500