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