Foreign exchange development history - exchange
market evolution foreign exchange development history - exchange
market evolution gold remittance system and Bretton woods agreement
Forex Development History
In 1967, a Chicago bank rejected to provide pound loan to a professor
named Milton Friedman, because his purposed was to use this fund
to sell short the British pound. Mr. Friedman realized excessively
that the price ratio from the British pound to US dollar at that
time was high, he wanted first to sell the British pound, after
the British pound fell he buys back the British pound to repay
the bank again. This family bank rejects the loan offer based
on the "Bretton woods Agreement" which was established
20 years ago. This agreement has fixed the various countries'
currency to US dollar exchange rate, and the price ratio between
the U.S dollar and the gold is also fixed to 35 US dollars to
each ounce of gold.
The Bretton Woods Agreement was signed in 1944, the purposed was
to prevent the currency to escape between countries, and also
to limit the international speculation, thus to stabilize the
international currency. Before this agreement was signed, the
gold remittance standard system which was widely used since 1876
- was leading the international economy system until the First
World War. In the gold remittance system, the currency was at
the stable level under the support of the gold price. The gold
remittance system has abolished the old time king and the ruler
which depreciates the currency value unlawfully, which will lead
But, the gold remittance standard system is certainly imperfect.
Along with a country economic potentiality enhancement, it can
import massive products from overseas, until it exhausts the gold
reserve of certain country. It resulted the supply of the currency
reduces, the interest rate raises, the economic activity will
start to decline until it reaches the recession limit. Finally,
the commodity price falls to the valley, gradually attracts other
countries to stream in, massively rushes to purchase this country
commodity. This will pour gold into this country, this will increase
this country currency supplies quantity, and it will reduce the
interest rate, and will create the wealth. This is so called the
"the prosperity - decline” pattern and is the circulation
of the gold remittance standard system, until the trade circulation
and the gold freedom was broken by the First World War.
After several catastrophes wars, the Bretton Woods agreement has
appeared. The countries which signed the treaty agreed to maintain
the domestic currency to US dollar exchange rate, as well as the
necessity of the corresponding ratio of the gold, and only allow
a small fluctuation. Countries are prohibited to depreciate the
currency value for the gain trade benefit, only allows the country
to depreciate not more then 10%. Enters the 50's, the continuous
growth of the international trade causes the fund large-scale
shift which produces because of the postwar reconstruction, this
causes Bretton Woods system which establishes the foreign exchange
rate to lose stability.
This agreement was finally abolished in 1971, US dollar no longer
could convert to gold. Until 1973, each major industrialized nation
currency exchange rate fluctuation has been more freely, mainly
regulates by the foreign exchange market through the currency
supplies and demand quantity. The business volume, the transaction
speed as well as the price variability, have achieved a comprehensive
growth in the 1970's, come along with the emerge of price ratio
fluctuation, the brand-new financial tool, then only the market
liberalization and the trade liberalization could be achieved.
In the 1980s, along with the published of the computer and correlation
technology, the international capital has flow rapidly, and strongly
related the Asia, Europe and America market. Foreign exchange
business volume from 80's rises daily from 70 billion US dollars
to 150 billion US dollars after 20 years.
European market inflation
One of the reasons why the foreign exchange developed rapidly
was the rapid development of the Euro dollar market. In a Euro
dollar market, US dollar is stored beyond the border of America
banks. Similarly, the European market is refers to property
depositing outside the currency rightful owner country market.
A Euro dollar market was formed at first in the 50's, at that
time Russia deposited its petroleum income beyond the US border,
avoid being freeze by the US government. This has formed a large
offshore US dollar national treasury which is beyond the control
of the US government. The American government has formulated
a law to prohibited US dollar from lending money for the foreigner.
Because the degree of freedom of the Euro dollar market is bigger
and the rate of return is bigger, therefore it has large attraction.
Starting from the 80's, the American company starts to borrow
loan from the offshore market, they discovered that the European
market is a wealth center which consists of large amount of
floating capital which could provide short-term loan.
London once was (until now still is) one of the main offshore
market. In the 80's, the Bank of England in order to maintain
its global finance industry center dominant position, using
US dollar as England pound substitution to make loan, thus to
become a Euro dollar market center. London's convenient geographical
position (is situated between Asian and Americas market) also
helps to maintain the European market as the dominant position.