Education

Forex History

Forex, Foreign Exchange or simply FX is the simultaneous exchange of currency amongst countries (the buying of a currency and selling of other).
The Forex market is not considered an over-the-counter or interbank market, transactions are conducted between two parties over the phone or via electronic network of banks, corporations and individual traders.
The trading is not centralized on "exchange places", there's no physical locations for the trades take place differently from stock and future markets.
The Foreign Exchange market solely is 30 times bigger than the combined volume of all USA equity markets. The daily turnover exceeds $ 1.9 trillion, it's considered the largest financial market in the world.
Currency trading is historically inherited from governmental (central banks) and institutional (commercial and investment banks), the Forex market is also soil of non-banking international corporations, hedge funds and individual private investors and speculators.

Thanks to the use of advanced technology and internet, now you can trade on Forex markets have the same privileges as big investment funds and wealthy investors. At Tamley Global Markets we offer you a state of the art platform which allows you to have a clear picture of the market and a range of tools to help you with your market analysis.

Timeline

Many centuries ago, the value of goods were expressed in terms of other goods. This sort of economics was based on the barter system between individuals. The obvious limitations of such a system encouraged establishing more generally accepted mediums of exchange. It was important that a common base of value could be established. In some economies, items such as teeth, feathers even stones served this purpose, but soon various metals, in particular gold and silver, established themselves as an accepted means of payment as well as a reliable storage of value.

Coins were initially minted from the preferred metal and in stable political regimes, the introduction of a paper form of governmental I.O.U. during the Middle Ages also gained acceptance. This type of I.O.U. was introduced more successfully through force than through persuasion and is now the basis of today's modern currencies.

Early Coinage

The first metal used as a currency was silver more than 4,000 years ago, when silver ingots were used in trade. Gold coins first were used from 600 B.C. However, long before this time, gold, as per silver, was used as a store of wealth and the basis for trade contracts in Akkadia, and later in Egypt. Silver remained the most common monetary metal used in ordinary transactions until the 20th century. It still circulates in certain bi-metallic coins, such as the Mexican 20-peso coin circa 2005.

The Persian Empire collected taxes in gold, and when it was conquered by Alexander the Great, this gold became the basis for the gold coinage of Alexander's empire. The paying of mercenaries and armies in gold solidified its importance: gold became synonymous with paying for military operations, as mentioned by Niccolò Machiavelli in The Prince 2,000 years later. The Roman Empire minted two important gold coins: the aureus, which was approximately 7 grams of gold alloyed with silvers, and the smaller solidus, which weighed 4.4 grams, of which 4.2 was gold. The Roman mints were fantastically active - the Romans minted and circulated millions of coins during the course of the Republic and the Empire.

After the collapse of the Western Roman Empire and the exhaustion of the gold mines in Europe, the Byzantine empire minted successor coins to the solidus called the nomisma or bezant. These were of the same weight and high purity as their Western Empire counterparts and still are considered to be solidi. Unfortunately, the Byzantine empire gradually degraded the purity of the coin from about the 1030s until, by the turn of the 11th century, the coinage in circulation was only 15% gold by weight. This represented a tremendous drop in real value from the old 95% to 98% gold Roman coins.

From the late seventh century, trade was increasingly conducted in the dinar. The dinar was a gold coin modeled on the original Roman solidus, having similar size and weight to the Byzantine solidus but produced by the Arab Empire. The Byzantine solidus and the Arab dinar circulated alongside one another for about 350 years before the solidus began its decline.

1284 - First solid gold coin

In 1284, the Republic of Venice coined its first solid gold coin, the ducat, which was to become the standard of European coinage for the next 600 years. Other coins, the florin, noble, grosh, zloty, and guinea, also were introduced at this time by other European states to facilitate growing trade. The ducat, because of Venice's pre-eminent role in trade with the Islamic world and its ability to secure fresh stocks of gold, would remain the standard against which other coins were measured.

1704 - The only legal tender

Beginning with the conquest of the Aztec and Inca Empires, Spain had access to stocks of new gold for coinage in addition to silvers. The primary Spanish gold unit of account was the escudo, and the basic coin the 8 "escudos" piece, or "doblón", which originally was set at 27.4680 grams of 22 carat (92%) gold, using current measures, and was valued at 16 times the equivalent weight of silvers. The wide availability of milled and cob gold coins made it possible for the West Indies to make gold the only legal tender in 1704. The circulation of Spanish coins would create the unit of account for the United States, the "dollar" based on the Spanish silver real, and Philadelphia's currency market would trade in Spanish colonial coins.

1717 - Sir Isaac Newton an his essay

The adoption of gold standards proceeded gradually. This has led to conflicts between different economic historians as to when the "real" gold standard began. Sir Isaac Newton included a ratio of gold to silver in his assay of coinage in 1717 that created a relationship between gold coins and the silver penny, which was to be the standard unit of account in the Law of Queen Anne; for some historians this marks the beginning of the "gold standard" in England. However, more generally accepted is that a full gold standard requires that there be one source of notes and legal tender, and that this source be backed by convertibility to gold. Since this was not the case throughout the 18th century, the generally accepted view is that England was not on a gold standard at this time.

1750 to 1870 - The crisis of silver currency and bank notes

To understand the adoption of the international gold standard in the late 19th century, it is important to follow the events of the late 18th century and early 19th. In the late 18th century, wars and trade with China, which sold many trade goods to Europe but had little use for European goods, drained silver from the economies of Western Europe and the United States. Coins were struck in smaller and smaller amounts, and there was a proliferation of bank and stock notes used as money.

In the 1790s England suffered a massive shortage of silver coinage and ceased to mint larger silver coins. It issued "token" silver coins and overstruck foreign coins. With the end of the Napoleonic Wars, England began a massive recoinage program that created standard gold sovereigns and circulating crowns, half-crowns, and eventually copper farthings in 1821. The recoinage of silver in England after a long drought produced a burst of coins; England struck nearly 40 million shillings between 1816 and 1820, 17 million half-crowns and 1.3 million silver crowns. The 1819 Act for the Resumption of Cash Payments set 1823 as the date for resumption of convertibility, reached instead by 1821. Throughout the 1820s, small notes were issued by regional banks, which finally were restricted in 1826, while the Bank of England was allowed to set up regional branches. In 1833, however, the Bank of England notes were made legal tender, and redemption by other banks was discouraged. In 1844 the Bank Charter Act established that Bank of England notes, fully backed by gold, were the legal standard. According to the strict interpretation of the gold standard, this 1844 act marks the establishment of a full gold standard for British money.

As a result, many of Britain's colonies were forced to resort to using token coins in the 1800s. Large numbers of token coins were issued by businesses at this time. The most famous of which is the trade tokens of Strachan and Company, South Africa's first widely circulating indigenous currency - first issued in East Griqualand in 1874.

The US adopted a silver standard based on the "Spanish milled dollar" in 1785. This was codified in the 1792 Mint and Coinage Act and by the Federal Government's use of the "Bank of the United States" to hold its reserves, as well as establishing a fixed ratio of gold to the US dollar. This was, in effect, a derivative silver standard, since the bank was not required to keep silver to back all of its currency. This began a long series of attempts for America to create a bimetallic standard for the US Dollar, which would continue until the 1920s. Gold and silver coins were legal tender, including the Spanish real, a silver coin struck in the Western Hemisphere. Because of the huge debt taken on by the US Federal Government to finance the Revolutionary War, silver coins struck by the government left circulation, and in 1806 President Jefferson suspended the minting of silver coins.

The US Treasury was put on a strict "hard money" standard, doing business only in gold or silver coin as part of the Independent Treasury Act of 1848, which legally separated the accounts of the Federal Government from the banking system. However, the fixed rate of gold to silver overvalued silver in relation to the demand for gold to trade or borrow from England. The drain of gold in favor of silver led to the search for gold, including the "California Gold Rush" of 1849. Following Gresham's law, silver poured into the US, which traded with other silver nations, and gold moved out. In 1853 the US reduced the silver weight of coins, to keep them in circulation, and in 1857 removed legal tender status from foreign coinage.

In 1857 the final crisis of the free banking era of international finance began, as American banks suspended payment in silver, rippling through the very young international financial system of central banks. In the United States this collapse was a contributory factor in the American Civil War, and in 1861 the US government suspended payment in gold and silver, effectively ending the attempts to form a silver standard for the dollar. Through the 1860-1871 period various attempts to resurrect bi-metallic standards were made, including one based on the gold and silver franc, however, with the rapid influx of silver from new deposits, the expectation of scarcity of silver ended.

The interaction between central banking and currency basis formed the primary source of monetary instability during this period. The combination that produced economic stability was restriction of supply of new notes, a government monopoly on the issuance of notes directly and indirectly, a central bank and a single unit of value. Attempts to evade these conditions produced periodic monetary crises - as notes devalued, or silver ceased to circulate as a store of value, or there was a depression as governments, demanding specie as payment, drained the circulating medium out of the economy. At the same time there was a dramatically expanded need for credit, and large banks were being chartered in various states, including, by 1872, Japan. The need for a solid basis in monetary affairs would produce a rapid acceptance of the gold standard in the period that followed.

Establishment of the international gold standard

Germany was created as a unified country following the Franco-Prussian War; it established the mark, went on to a strict gold standard, and used gold mined in South Africa to expand the money supply. Rapidly most other nations followed suit, since gold became a transportable, universal and stable unit of valuation. See Globalization.

Dates of adoption of a gold standard

• 1871: Germany
• 1873: Latin Monetary Union (Belgium, Italy, Switzerland, France)
• 1873: United States de facto
• 1875: Scandinavia by monetary Union: Denmark, Norway and Sweden
• 1875: Netherlands
• 1876: France internally
• 1876: Spain
• 1879: Austria
• 1893: Russia
• 1897: Japan
• 1898: India
• 1900: United States de jure .

Throughout the decade of the 1870s deflationary and depressionary economics created periodic demands for silver currency. However, such attempts generally failed, and continued the general pressure towards a gold standard. By 1879, only gold coins were accepted through the Latin Monetary Union, composed of France, Italy, Belgium, Switzerland and later Greece, even though silver was, in theory, a circulating medium.

1901 to 1932 - Gold standard from peak to crisis

An increase in living standards
By 1900 the need for a lender of last resort had become clear to most major industrialized nations. The importance of central banking to the financial system was proven largely by examples such as the 1890 bail out of Barings Bank by the Bank of England. Barings had been threatened by imminent bankruptcy. Only the United States still lacked a central banking system.

There had been occasional panics since the end of the depressions of the 1880s and 1890s which some attributed to the centralization of production and banking. The increased rate of industrialization and imperial colonization, however, had also served to push living standards higher. Peace and prosperity reigned through most of Europe, albeit with growing agitation in favor of socialism and communism because of the extremely harsh conditions of early industrialization.

Abandoning the standard to fund the war

This came to an abrupt halt with the outbreak of World War I. The United Kingdom was almost immediately forced to take steps that would lead to its gradually leaving its gold standard, ending convertibility to Bank of England notes starting in 1914. By the end of the war England was on a series of fiat currency regulations, which monetized Postal Money Orders and Treasury Notes (later called banknotes, not to be confused with US Treasury notes). The need for larger and larger engines of war, including battleships and munitions, created inflation. Nations responded by printing more money than could be redeemed in gold, effectively betting on winning the war and redeeming out of reparations, as Germany had in the Franco-Prussian War. The US and the UK both instituted a variety of measures to control the movement of gold, and to reform the banking system, but both were forced to suspend use of the gold standard by the costs of the war. The Treaty of Versailles instituted punitive reparations on Germany and the defeated Central Powers, and France hoped to use these to rebuild her shattered economy, as much of the war had been fought on French soil. Germany, facing the prospect of yielding much of her gold in reparations, could no longer coin gold "Reichsmarks," and moved to paper currency.

The series of arrangements to prop up the gold standard in the 1920s would constitute a book length study unto themselves, with the Dawes Plan superseded by the Young Plan. In effect the US, as the most persistent positive balance of trade nation, lent the money to Germany to pay off France, so that France could pay off the United States. After the war, the Weimar Republic suffered from hyperinflation and introduced "rentenmark," an asset currency, to halt it. This worked properly, although one more year had to pass until a new gold backed reichsmark came into circulation.

Return to the gold standard

In the UK the pound was returned to the gold standard in 1925, by the somewhat reluctant Chancellor of the Exchequer Winston Churchill, on the advice of conservative economists at the time. Although a higher gold price and significant inflation had followed the WWI ending of the gold standard, Churchill returned to the standard at the pre-war gold price. For five years prior to 1925 the gold price was managed downward to the pre-war level, meaning a significant deflation was forced onto the economy.

John Maynard Keynes was one economist who argued against the adoption of the pre-war gold price believing that the rate of conversion was far too high and that the monetary basis would collapse. He called the gold standard "that barbarous relic." This deflation reached across the remnants of the British Empire everywhere the Pound Sterling was still used as the primary unit of account. In the UK the standard was again abandoned in 1931. Sweden abandoned the gold standard in 1929, the US in 1933, and other nations were, to one degree or another, forced off the gold standard.

1933 to 1945 - The depression and Second World War

The London conference

In 1933, during the Great Depression, the London conference marked the death of the international gold standard as it had developed to that point in time. While the United Kingdom and the United States desired an eventual return to the Gold Standard, with President Franklin D. Roosevelt saying that a return to international stability "must be based on silver instead of gold" - neither was willing to do so immediately. France and Italy both sent delegations insisting on an immediate return to a fully convertible international gold standard. A proposal was floated to stabilize exchange rates between France, the United Kingdom and the United States based on a system of drawing rights, but this too collapsed.

The central point at issue was what value the gold standard should take. Cordell Hull, the US Secretary of State, was instructed to require that relation of prices occur before returning to the Gold Standard. There was also deep suspicion that the United Kingdom would use favorable trading arrangements in the Commonwealth to avoid fiscal discipline. Since the collapse of the Gold Standard was attributed, at the time, to the U.S. and the UK trying to maintain an artificially low peg to gold, agreement became impossible. Another fundamental disagreement was the role of tariffs in the collapse of the gold standard, with the liberal government of the United States taking the position that the actions of the previous American Administration had exacerbated the crisis by raising tariff barriers.

The gold ban

As part of this process, many nations citation needed, including the U.S., banned private ownership of gold using the Trading With the Enemy Act for statutory authority to abrogate gold and silver clauses in U.S. Securities and impose fines of up to $10,000 on those who refused to do so. Over this period President Franklin D. Roosevelt passed two laws prohibiting U.S. citizens and the Federal Reserve ownership of gold, Executive Order 6102 of 1933 and the Gold Reserve Act of 1934. Jewelry, private coin collections, and the like were exempt from this ban, which in any case seems not to have been enforced too zealously. In 1975 all restrictions on the right of American citizens to own gold were abolished.

During the period of the gold ban American citizens were required to hold only legal tender in the form of central bank notes. While this move was argued for under national emergency, it was controversial at the time. The Supreme Court upheld the Congressional action in 1934, but there are still some who regard it as an usurpation of private property.

Stabilizing global finance

In the years that followed, nations pursued bilateral trading agreements, and by 1935 the economic policies of most Western nations were increasingly dominated by the growing realization that a global conflict was highly likely, or even inevitable. During the 1920s the austerity measures taken to restabilize the world financial system had cut military expenditures drastically, but with the arming of the Axis powers, war in Asia, and fears of the Soviet Union exporting communist revolution, the priority shifted toward armament, and away from re-establishing a gold standard. The last gasp of the nineteenth century gold standard came when the attempt to balance the United States Budget in 1937 led to the "Roosevelt Recession." Even such gold advocates as Roosevelt's budget director conceded that until it was possible to balance the budget, a gold standard would be impossible.

Mefo financing

Nazi Germany, as part of its pogrom against the physically or mentally handicapped, Slavic citizens, Gypsies, and Jews, used the gold looted from them to finance its war effort. Some Swiss banks were among the international banks who ended up handling gold deposits from this source. The gold was then deposited with the Reichsbank and used as the basis for notes to be issued which were to be accepted as currency. The Reich then instituted wage and price controls, backed by internment in prison camps, to prevent this Mefo financing (Metallurgische Forschungsanstalt) from producing hyper-inflation.

English hesitate to return to gold standard
During the 1939-1942 period, the UK depleted much of its gold stock in purchases of munitions and weaponry on a "cash and carry" basis from the US and other nations. This depletion of the UK's reserve signalled to Winston Churchill that returning to a pre-war style gold standard was impractical; instead, John Maynard Keynes, who had argued against such a gold standard, became increasingly influential: his proposals, a more wide ranging version of the "stability pact" style gold standard, would find expression in the Bretton Woods Agreement.

1944 - The Bretton Woods Agreement

The Bretton Woods system of international monetary management established the rules for commercial and financial relations among the world's major industrial states. The Bretton Woods system was the first example of a fully negotiated monetary order intended to govern monetary relations among independent nation-states.

Preparing to rebuild the international economic system as World War II was still raging, 730 delegates from all 44 Allied nations gathered at the Mount Washington Hotel in Bretton Woods, New Hampshire for the United Nations Monetary and Financial Conference. The delegates deliberated upon and signed the Bretton Woods Agreements during the first three weeks of July 1944.

Setting up a system of rules, institutions, and procedures to regulate the international monetary system, the planners at Bretton Woods established the International Bank for Reconstruction and Development (IBRD) (now one of five institutions in the World Bank Group) and the International Monetary Fund (IMF). These organizations became operational in 1946 after a sufficient number of countries had ratified the agreement.

1973 - The Floating Exchange Rates

By 1972 a few major countries, such as the UK, suffered economical difficulties and initiated the floating of their currencies. The Smithsonian agreement was signed in 1971 and meant creating a more flexible agreement than Bretton woods where currencies had the ability to fluctuate more. The European market also tried to move from its dependency on the US dollar with more joints and agreements signed to ensure currencies' extended flexibility. Both the Smithsonian agreement and the European Joint Float collapsed, signifying the official switch to a free-floating currency system. Governments were now free to peg their currencies or allow them to freely float. In 1978, the free-floating system was officially mandated, but like previous attempts failed in 1993.

1994 - Forex and Internet

Forex markets handle a huge volume of transactions 24 hours a day, 5 days a week. Daily exchanges are worth approximately $1.5 trillion (US dollars).
In comparison, the United States Treasury Bond market averages $300 billion a day and American stock markets exchange about $100 billion a day.
The internet has made foreign exchange trading available to everyone, you can select a broker, apply for an account and starting trading online. With start of the art software, like the one we have at Tamley Global Markets the home trader now have the same liquidity and conditions as banks and corporations.