As we have bring up above, anybody or person from any country can join the Forex market at any moment and influence it. For instance, your currency exchange will effect exchange rates at the local bank; this local bank’s exchange business will influence a larger bank’s exchange rates from which the smaller bank takes the foreign currency from, and that larger bank is perhaps a market-maker – one link of the whole market chain. It doesn’t really matter that your role is small, what is important is that it exists.
Bretton Woods’s contract
Before July 1944 the world currency system was different. It was based on the major that an amount of money could buy you what it was worth in gold. Certainly, not every country approved to accept any currency in international exchange. The majority of money was not exchangeable into gold and was only used for internal payments in a country.
Without having an obvious effect on the world economy, these currencies were not convertible (“convert” meaning exchange). Only the bills of certain large countries were convertible into gold: Great Britain (pound sterling) and the USA (US dollar). In order to buy something abroad, for instance, gold, equipment or even Chinese fur coats, a businessman or bank had to exchange their money into US dollars or pounds first. The situation then changed.
By July 1944, the Second World War had crushed the economies of most war members except the USA, which had experienced the smallest relative losses. Countries had to decide how to rebuild trading relationships between them and what they would be after the horrifying war was over. Not long before the end of the war, representatives of 41 countries gathered together in Bretton Woods (a tiny city in the USA with a population today of 600 people) to discuss the renovation of the traditional system of gold standards.
It is worth saying that by 1944 the USA had taken into ownership two-thirds of the world’s gold reserves. Most likely that was the reason why the US dollar became the only reserve currency in the world after the Bretton Woods meeting. In other words, 41 countries confirmed that only gold could be more consistent than US dollars. Moreover, in order to support international financial operations, the International Monetary Fund was created in 1944. This fund give credits to contributing countries when they needed to support their currency on a nominal basis (that is, not considering inflation).
The US dollar and gold became the main payment means for these countries. All World prices for gold were set in US dollars and banks who had joined the IMF got the chance to change US dollars to gold at a fixed rate. The USA government assured to keep the rate at the level of “1 ounce of gold for 35 US dollars, plus-minus 1%” and to change dollars back to gold at this rate upon demand. All other countries fixed their national rates within the limits of 1% of the nominal and there were minimal increase and decrease.
Exchange weakening of a currency was available for joining countries, but only with IMF permission and could be not more than 10%. Actually, no one wanted devaluation of their currency. It was gainful for many countries to use US dollars as a reserve currency and not gold. Though, there were contradictions in the system of super-stable currency rates: while all dollars were to be confirmed by real gold, at the same time more and more dollars were being printed as countries had started to trade more.
Jamaica Contract, new currency system and appearance of Forex
After the Bretton Woods system lost its power in December 1971, the US dollar certainly lessened and in reaction the price of gold increased. A Troy ounce of gold cost 38 US dollars and a year later it cost 42.2 dollars. Japan and nearly all the European countries decided to ignore the agreement and left it in 1973, as they felt there was little support for countries in trouble. At that very moment, the system of fixed rates was dead and its place was taken by an unpublished system of variable rates with decisive interference from Central Banks.
In January 1976 Jamaica IMF member countries join together another time to sign a new paper to control international trading. Gold was no longer an equivalent to money and there was no need for the “golden cover” any longer. So gold regularly floated to the category of goods or raw materials. One could buy any amount of gold in any country and the US dollar exchange rate would have nothing to do with it. Since that moment, countries became responsible for the future of their currency. A new international currency SDR (Special drawing rights) was introduced. It was a type of complete money of the IMF that existed in some special accounts of certain countries.
Stabilities of these accounts matched with the contribution of a given country to the IMF. Central Banks of different countries were allowed to shape their own policy. So long, big IMF brother! The Jamaican meeting was not only meant to bring joy to its participants but to mark the beginning of a new flexible system of international trading which would help to make it more simple for new countries to get used to the condition. Nonetheless, the US dollar stayed the major currency for all international payments. Why? Because the economy of the US was the most steady amid participating countries. The new agreement had the effect of “curing” the dropping dollar.
With no link to gold anymore, there was no reason for it to lessen. By 1985 the cost of the US dollar had improved by three times. The other countries didn’t get any benefit out of the agreement except getting free tourist vouchers for their officials. The global situation had dramatically changed. Currencies had nothing to depend on except wise international trading and a high level of manufacturing. There were no such supporting things for most countries. Persistent inflation, continuous currency speculation, the linking of a national currency to foreign ones became normal practice for the major part of most countries’ economies. However improvement of Forex has not stopped yet, the Jamaica Conference of 1976 is considered to be the real moment when the Forex market was born. Just after that meeting, people from all over the world were allowed to participate in speculative currency deals.
European currency structure
According to this significant conference, European governments came to terms with some ideas of their own. So as to support the individuality of their economies, some western European countries made their own currency system (that is, the European Currency System) that was on the basis of the ECU (European Currency Unit). Each country’s part in the general basket was dependent on its GNP (Gross National Product – the brief cost of all goods manufactured and services made), on the level of goods circulation and mutual crediting. Also, the ECU was somewhat supplied with once traditional gold.
The maximum variation of any European currency rate was set at the level of 2.25% from the prearranged one (“central rate”) and the mutual quotations were calculated in ECUs. As soon as any currency approached 75% of the maximum fluctuation of 2.25% special early compensatory measures were taken. While this system supplied some steadiness, it was not any ideal. For instance, Great Britain entered the ECS in 1990 but soon left just a few years later in 1992, because of the negative influence of the European system on the British currency. The steadiness of the European system was, in turn, weakened by Britain’s exit.
The European currency system had to raise the maximum level of variation to the value of 15%. In 1995, the ECU was replaced by the Euro. The new agreement was signed by 12 economically progressive countries. Since June 2002, the euro has become available for private using. By the end of 2007, the rate of the euro had improved by 50% against the US dollar. The European currency became desirable as a reserve currency just as much as the US dollar. Ultimately, the currency world had started to expand.
Forex market: is the place where trading is done at market prices ordered by the law of supply and demand. There are exchange and over the-counter (interbank, OTC) currency markets.
Stock exchanges: for example the New York Stock Exchange, are reactions of business movement, where traders work in a building (exchange house) and all day long the scream of “Buy or Sell!” can be heard.