top braking news about Financial

A Brief History of Forex

July 20, 2020

Introduction

In this day and age, most of us have side hustles. Some of us even try our hand at the stock market or on the foreign exchange trade, commonly known as Forex. The foreign exchange market provides an opportunity to make a profit based on the rise and fall of different countries’ currency exchange value. Although Forex has only officially been around since the 20th century, the trading of currencies for profit is a practice that is hundreds of years in age.

Money and Banks

Money has been used throughout history to exchange goods and services. It is much easier to barter when we don’t have to carry a sack of potatoes back and forth! Coins slowly made way for paper bills. Paper has given rise to a currency that is only represented by a number on a computer screen. Most of the money exchanged today will never be held in anyone’s hands.

Interest on loans or lending money for a profit was forbidden in most religions, including Christianity. Although it was also forbidden in the Jewish religion as well, Jewish people were not allowed to hold most professions in Europe. The jobs that were prohibited for Christians were often the only jobs remaining for Jewish people as a means of employment. This meant that many Jewish people entered banking and trading in the Middle Ages.

Merchant banks were the first type of bank that emerged in Europe. These were banks that helped process transactions between traders. The banks also would lend money to farmers before planting season and receive a profit after harvesting, or alternatively, take a more significant profit off of future harvests a year was unfruitful.

Foreign Exchange

The first official foreign exchange contract was made in 1156 when 115 pounds were borrowed in Genoa and would be paid back in Constantinople in the equivalent sum of 460 bezants. This type of contract soon became very popular due to its convenience.

The Medici family in Italy became involved in banking and then later took over their first bank in 1393. They began to expand their banking empire throughout Italy and Europe, creating exchange opportunities between traders and merchants throughout Europe. Although charging interest, or usury, was forbidden by Christian law at the time, the Medicis found a loophole. They began to charge interest in bills of exchange. The foreign currency was provided at a later date. This made certain that their business practices followed all rules that were demanded at the time by Catholic law, while simultaneously allowing for them to make a profit.

The Gold Standard

The gold standard has been used to support a currency’s value for thousands of years. Even in ancient Egypt, the cost of goods was measured against the value of a set amount of gold. This standard eventually changed to the silver standard in Egypt due to the religious symbolism gold held for the Egyptians. It wasn’t proper for gold, which held such a high place in the Egyptian religion, to be used to buy common objects.

Gold was subsequently used around the world to connect a currency with a set value. While this provided stability in a currency’s value, it caused various problems. When money is linked to an amount of gold, the amount of money that can be printed is finite and is based on the amount of gold that has been mined or is in a savings vaults.

Forex System
Forex System

The US dollar was partially taken off of the gold standard during the Great Depression in 1933. The government wasn’t able to stimulate the economy as was necessary without producing more money, which proved impossible while remaining on the gold standard. The dollar was fully cut from the gold standard in 1970. The dollar is now fiat money. This means that although it is legal tender, the dollar is not fixed to any other valuable good, like gold or silver. The value of the dollar is now defined by the market and the government.

Bretton Woods

After World War II, most of the worlds’ economies were reeling in the aftermath. The Bretton Woods Agreement was made between 44 countries. It tied the US dollar to the gold standard and all the other currencies to the US dollar. This was a turning point in history. For the first time, the dollar became the primary international currency, replacing the British Pound. The goal of this agreement was to prevent competitive devaluation, a practice where countries devalue their currency to improve export value. If the cost of goods is lower, other countries will want to import from that country. Competitive devaluation occurs when nations begin to engage in a devaluation of their currency in order to make their market more appealing.

The Bretton Woods Agreement was kept in place until 1970 when the dollar was taken off the gold standard by President Nixon. What remains after the dissolving of this agreement is the International Monetary Fund (IMF) and the World Bank.

Other Agreements

After the Bretton Woods Agreement fell apart, this led to the creation of several other temporary accords. The Smithsonian Agreement was made between the ten leading nations at that time. It was an adjusted version of the Bretton Woods Agreement and only was in place for 15 months before collapsing due to speculation and further devaluation of the US dollar. The European Joint Float was created for European countries in an effort to be independent of the US dollar as an interim system after the Smithsonian and Bretton Woods Agreements. The fall of these two agreements even caused a brief shutting down of the foreign exchange market. After the failure of multiple agreements, the foreign currency exchange began as we know it.

OPEC

While governments were figuring out a new system of foreign exchange, the OPEC oil crisis occurred from 1973 to 1974. The OPEC crisis happened when certain members of OPEC decided to raise the price of oil to almost four times its previous value and did not allow for exports to the US, Japan, and Europe. This embargo caused stagflation in the American and international economies.

Forex As We Know It

The European Monetary System was created in 1979. It was an agreed-upon arrangement between several European countries that allowed for currency exchange to take place and to limit the amount of currency fluctuation and created a new currency called the European Currency Unit.

The European Currency Unit was a combination based on a weighted average of European currencies. It was a precursor to the modern Euro that we have been using since 1999. The European Currency Unit was controlled by the European Exchange rate mechanism. This is a system that was created to ensure stable exchange rates and stabilize the European market. With the implementation of a single currency for the European market, the trade value of this currency has only risen.

Devaluation in Practice

The most recent event of devaluation we have witnessed was by China last year. The People’s Bank of China devalued the yuan. This created further conflict between China and America. The US Treasury Department accused China of manipulating its currency for its own benefit and to hurt the American market. Many suspects that this step taken by the Chinese government was in response to new American tariffs on Chinese imports to America. We can witness in the modern world how the manipulation of foreign currency rates can affect international trade and economies.

Risk

Along with the rewards associated with foreign currency exchange, there are also numerous risks. One of these risks is foreign exchange risk. Losses may be incurred by a financial institution due to the fluctuations in international currency value. For example, if we are conducting business in Russia and making a profit in the domestic currency of rubles, we are making a profit in dollars as well. This is only as long as the global market remains stable. If Russia suffers from a financial crisis or trade wars begin, the ruble begins to tumble and may quickly lose its value. In this case, we immediately begin to lose money. Our profit in local currency may continue, but the exchange rate into another currency rises so high that we are actually losing money. Our initial investment may also lose value due to the change in currency exchange rates. Some governments use this as a scare tactic to blackmail other governments. The threat of a financial crisis is often enough to bend politicians to bow to another country’s will.

Trading

Foreign trade gives each nation a specific advantage. Some countries, such as China, are able to produce cheap electronics. Other countries, like Germany, are better at producing high-end automobiles. It is, of course, possible to produce electronics in other countries than China, but the price of the product would be overwhelming. In such cases, every country produces what they are good at, and then they trade among themselves. Since it would be difficult and inconvenient for France to trade 100 helicopters to Japan in exchange for Malaysian office machine parts, we use foreign currency exchange. Each country sells its product and converts the money into one or another currency.

In the 1960s, banks began investing money into technology companies and funding new technology as a way to virtually stay in touch with foreign markets. In 1973, computer monitors were introduced and became the go-to tool for acquiring up to date quotes.

Trade market
Trade market

Today around $6 trillion is traded on the foreign exchange each day. The forex market is currently the largest financial market in the world.

Lehman Brothers

Since forex trading has proved so lucrative, many companies have been eager to engage in this type of business. One of these firms was Lehman Brothers, a global financial services firm. They filed bankruptcy in 2008 and remains the biggest bankruptcy case to date. Their bankruptcy furthered the 2008 financial crisis.

Technology

The technology boom has obviously made waves in the forex industry and revolutionized the way traders conduct business. Most trades are now made on automated platforms, where before trades were always made by human beings. The cutting edge in Forex is now not who is the most lucrative trader, but who has the best program or the best trading robot. These robots analyze the market and manage trades themselves. Obviously, robots never need sleep, and they can be on the market 24/7. They are also quicker than human beings. Most risk assessment is now conducted by robots; they are able to make better decisions with a larger amount of information. This technological evolution has caused changes and growth in the forex industry.

Along with increased freedom, changes in technology have brought with them increased risk and the need for more regulation and oversight. The volume of trades is increasing, and the amount of data is also increasing. Fraud and data theft are becoming more common. 600 years ago money could be stolen by highwaymen. Now money can be stolen from us by hackers sitting on their sofas.

Foreign currencies have a new rival on the horizon, cryptocurrencies. The growth of Bitcoin and similar cryptocurrencies have opened another trade market for forex traders.

Conclusion

The foreign exchange began thousands of years ago. Although the industry is almost unrecognizable from its original state, the gist remains the same, making a profit off of differences in currency exchange rates. While the face of the Forex continues to change, the market will continue to provide new and exciting opportunities for investment.

the Latest news

Investing in Ukrainian Real Estate

The real estate market in Ukraine offers great opportunities for investing. Due to the low prices for real estate which dropped by 20-50% since the times of political and economical crisis in 2013, the real estate sector now provides the chance to enter the market and receive significant revenue from the investment.

Read now

Exon Premier

Great opportunities and benefits of investing with the Exon Premier REIT along with the detailed review of 50th avenue apartment and office complex.

Read now