The Forex market can trace its roots back to about 1880 and has gone through a few major changes over the years to become the vibrant trading market it is today. The early days of currency were based on the value of gold and silver, which provided a consistent standard for trading between countries with a fairly stable value. Gold and silver coins could be used between countries for the purchase of goods and services. The price of these two rare metals was largely determined by the current available supply and changed with every discovery of new deposits. This made the coins fairly stable when trading within a country but their value could vary considerably between countries depending on how much gold the country held in reserve.
Establishing the Gold Standard
To try and stabilize the value of a country’s currency internationally, the “gold standard” was established. This gold standard was a system that set the value of a country’s currency against the same value of gold being held by the country in reserve. In the United States, this meant that every dollar in circulation was backed by the same value of gold being held in the treasury. If a country had less gold in reserve, or printed more money against the gold they had, their currency would be worth less when traded with another country. Paper money became very popular since anyone using it knew they could redeem the notes for the same value of gold at any bank.
The Bretton Woods Agreement
This all changed in 1944 with the Bretton Woods agreement that tied the international standard for currency to the U.S. dollar. This agreement was ratified by 44 different countries and was an attempt to establish a standard of comparison for various countries’ currencies. This standard locked the value of the dollar to one thirty fifth of an ounce of gold in value. Every other currency was then compared to this standard for international currency exchanges.
Birth of the Modern Forex Market
The Bretton woods agreement lasted for only a short time and in 1971 it was totally abandoned when the value of the dollar was once again allowed to float. The ending of this agreement paved the way for the Forex market we know today. In the current system, the value of a country’s currency is largely determined by the health of their economy, the stability of their government and a wide range of other economic factors. As any of this data changes, so will the value of their currency when compared to other countries.
In this modern currency exchange, a country’s currency value can fluctuate significantly over short periods of time and allows for a trader to profit from these changes. This difference in the value of two country’s currency is the basis of the modern Forex market. As a country’s currency appreciates in value you can profit if you pick the right currency pair. Because a countries currency is constantly changing in value in response to world events, the Forex market provides a great opportunity for investors to profit from this speculation.
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