Market History

Description

Currency trading has a rich history that dates back to the times of the Ancient East. During the Middle Ages, international banks arose, which began to use various means of exchange. At that moment, the foreign exchange market began to look like it does today.

The modern foreign exchange market, which is characterized by a floating rate depending on supply and demand, developed in the twentieth century. Until the mid-1930s, England was the leading center of trade, including currency trading. The British pound was used for settlements and the creation of foreign exchange reserves. At that time, currency trading was carried out mainly with the help of telegraphs, so the British pound had the common name “cable” (from English – telegram). In 1930, a bank was founded in Basel (Switzerland), whose functions included monitoring the financial activities of the newly independent states and providing foreign exchange support to countries experiencing temporary budgetary or payment difficulties.

After the Second World War, the British economy was destroyed; the British pound lost its former influence and could no longer play the role of a reserve currency. The United States was one of the few countries whose economy was virtually unaffected by the war. Therefore, the US dollar has become the main world currency. Since then, currencies around the world have been valued primarily in terms of the US dollar.

Over the past few years, the Forex market has been shaped by the following events:
the Bretton Woods agreements; 
the emergence of floating exchange rates; 
the formation of foreign exchange reserves; 
creation of the International Monetary Fund (IMF); 
creation of the European Monetary Union and the European Monetary Cooperation Fund.

In 1944, the United States, Britain, and France entered into the Bretton Woods Agreement. These countries agreed on the measures necessary to ensure the stability of the currencies, which included government controls on the prices of currencies. To achieve this, an artificial binding of currency prices was carried out, and the International Monetary Fund (IMF) was created. Under the Bretton Woods agreements, the prices of major currencies were pegged to the US dollar, with the condition that prices could change by no more than one percent against the dollar. Suppose the price of the currency went beyond the agreed limits. In that case, the corresponding central bank must carry out the purchase or sale of its currency in order to restore its value within the corridor established by the agreements. The US dollar was pegged to the value of gold at $35 per ounce. Thus, The US dollar began to play the role of world reserve currency. The following functions were entrusted to the International Monetary Fund:
holding consultations in order to maintain the stability of the currency exchange system; 
allocation of credits to member countries of the fund.

In general, the main tasks of the IMF are
the development of international cooperation and trade; 
maintaining the stability of exchange rates; 
development of a multilateral system of international payments; 
ensuring the availability of financial resources.

To achieve these goals, the IMF uses instruments such as reserve tranches, allowing countries to draw on reserves from their membership quotas as they fall due, credit lines, and stand-by arrangements. Credit lines and stand-by agreements are standard forms of IMF loans, in contrast to compensatory financial support, which is designed to expand financial assistance to countries with temporary problems caused by a decrease in exports; restocking to help build primary commodities to ensure price stability for specific commodity groups; and extended support to help countries in financial difficulty that is larger or longer than other types of assistance.

Beginning in 1978, the IMF officially sanctioned floating exchange rates. This means that anyone can trade this currency; its price is determined as a function of current supply and demand in the market, and there are no special intervention positions that require constant monitoring. Of course, the US Federal Reserve periodically intervenes to correct the value of the dollar, but there are no longer any predetermined specific levels. Naturally, there is the highest demand for floating currencies.

For the population and corporations, the means of protecting investments in a period of economic or political instability is the foreign exchange reserves necessary for international transactions. Immediately after World War II, the US dollar was the world’s reserve currency. Currently, there are other reserve currencies – the euro and the Japanese yen. The portfolio of reserve currencies may change depending on the specific international environment; for example, the portfolio may include
the Swiss franc.

The creation of the European Union (EU) was the result of a series of long and continuous post-war efforts to establish closer economic cooperation between the European capitalist countries. The official aims of the formation of the EU were to improve intra-European economic cooperation, create regional areas of financial stability, and act as a “pole of stability in global financial markets.” The first steps in this direction were taken in 1950 when the European Payments Union was created to encourage intra-European agreements on international trade transactions. The purpose of this organization was to promote intra-European trade in general and to remove restrictions on trade, in particular in coal and crude steel.

In 1957, the Treaty of Rome formed the European Economic Union (EEC) with the same members as the European Coal and Steel Commission. The statutory goals of the EEC were the elimination of customs duties and any other barriers to financial flows, the provision of services, and the movement of people between member countries of the
union. At the external borders of the EEC, the installation of common tariff barriers was simultaneously begun. The European Union consists of the following four executive and legislative bodies.

1. The European Commission is the executive body for the implementation and control of the general policy. Since it does not have its supervisory apparatus, this Commission is forced to rely on the local governments to verify the implementation of Union policies. It consists of 23 departments, such as foreign
politics, competition, and agriculture. Each country elects its representatives to the Commission for a four-year term. The Commission is based in Brussels and consists of 17 members.

2. Council of Ministers. Makes major political decisions. Includes representatives from 12 EU member states. It is headed for 6 months by each of its members in alphabetical order. The meetings of the Council of Ministers take place in Brussels or in the capital of the country whose representative is currently chairman.

3. European Parliament. Reviews and adopts legislative decisions and has the authority to accept or reject budget proposals. Consists of 518 elected deputies. It is based in Luxembourg, but meetings are held in Strasbourg or Brussels.

4. European Court. Adopts decisions on contentious issues between the EU and member states. It consists of 13 members and is located in Luxembourg.

In 1963, a cooperation agreement was signed between France and the FRG. This treaty was intended not only to end centuries of armed confrontation but also to establish a post-war deal between the two traditional adversaries. The treaty stipulated that West Germany, during the Cold War, would have the opportunity for economic development, and France, as the center of diplomatic initiatives, would assume political leadership. The terms of the treaty clearly corresponded to the situation, which was determined by the expectation of a long and constant period of the Cold War and the division of Germany. The Conference of Heads of State in 1969 decided the goals of creating a monetary union within the framework of the European Union. This goal was supposed to be reached by 1980 when Europe planned to introduce a common currency, the ECU (ECU).

In 1978, nine members of the EU adopted another plan to ensure stability – through the creation of a European monetary system. A practically new system began to operate in 1979. Seven countries became its full members – Germany, France, the Netherlands, Belgium, Luxembourg, Denmark and Ireland. Great Britain did not participate in all these
agreements, and Italy joined them on special terms. Greece joined in 1981, followed by Spain and Portugal in 1986. In 1990, Great Britain joined the agreement on the currency pricing mechanism.

The European Monetary Cooperation Fund was formed to manage the lending activities of the European Monetary System. To increase the attractiveness of the ECU, countries with the largest reserves of currency in the ECU or making loan payments in excess of such reserves were charged interest on the difference and vice versa. The amount of interest was determined as a weighted average of the discount rates of all members of the European monetary
system.

In 1998, the euro was introduced as the common European currency.