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The History of FOREX

Foreign Exchange dates back to ancient history, possibly with the introduction of 'coinage' by the early Egyptians and the 'notes' of the Babylonians. A basic form of international monetary system was practiced in the Middle East during biblical times when the 'aureus,' a gold coin from Rome was universally accepted followed by 'denarius' a silver coin, which was a common reserve between money changers during the period. The Middle Ages saw the rise of foreign exchange as an act of international banking when bills started to be used by the trade princesses and international credit papers in the process of supporting the war of the period by the emerging powers of Europe.

Among the major currencies, the dollar of the United States implemented the gold standard in the latter part of 1879 and eventually replaced the British Pound as the leader at a time when Britain and other countries of Europe left the system due to the start of the First World War in 1914. However, the deteriorating worldwide depression eventually caused the dollar to leave the gold standard in 1933 at the time when international trade and financial surge was on a downfall before the Second World War.

In July 1944, 45 countries attended a meeting initiated by the US designed to come up with a new worldwide financial structure which aims to ensure progress after the war as well as to avoid the repeat of the global depression of the 1930s. The Bretton Woods system was born and strengthened the role of the US dollar as the new 'worldwide' stock currency with a value fixed into gold. The US was responsible for guaranteeing conversion to gold while other currencies were built on the dollar.

After nearly three decades of controlling the international monetary system, Bretton Woods recorded an increase in structural discrepancies among the economies resulting to escalating instability and gossips from June 1972 to June 1973. During that period, the UK was encountering problems in their deficit consequently floated the Sterling, which fluctuated even more in February 1973 dropping 11 percent together with the Swiss Franc and the Japanese Yen.

In the end, the European Economic Community had no choice but to float their currencies as well.

In the midst of the problems of Bretton Woods were the weakening belief in the ability of the dollars to preserve full convertibility and the reluctance of remaining countries to revalue due to its great effect on external relations. Despite a last minute attempts by the Group of Ten finance ministers via the Smithsonian Agreement of 1971, the international monetary system saw increasing rate of exchange getting restrained.

Many times attempts to reestablish restricted systems were carried out with different degrees of success, the most popular is that of the Exchange Rate Mechanism of Europe during the 1990's which paved the way for the establishment of the monetary union and the current Euro implemented in 12 countries.