What is the Forex market?
Before moving on to the gold standard, let's review the concept of Forex trading. Forex trading means trading in currency pairs. That is, it is an exchange of one currency for another. Traders make money when market prices fluctuate. After all, the trader gets a profit when buying currency at a lower rate and selling it at a higher rate. These market fluctuations are influenced by several factors, among which we can note the following:
- Interest rate. The interest rate is the rate at which the central bank provides funds for use. When the interest rate increases, the rate for deposit investments also increases. This makes the country more attractive to foreign investors. Foreign currency flows into the country, which strengthens the country's currency. The central bank can change the interest rate.
- Cost of raw materials. Every country depends to one degree or another on the export of natural resources. Such as oil, coal, ores, and others. And countries whose volume of export of these resources is quite large receive a large profit from these sales. When the price of resources increases, the country's profit becomes larger, which strengthens the national currency. If such a situation occurs that the demand for these resources becomes less or the supply increases sharply, then the price of the resources falls accordingly. Such events deal a blow to economies that depend on the sale of these resources and, accordingly, the value of national currencies decreases.
- Export volumes. Export volumes usually show how attractive a country's products are. The higher the demand for goods produced in that country, the more foreign currency enters the country, which in turn, increases the value of the national currency.
- Trade actions of major players. In Forex, there are several Forex sessions, which, accordingly, create a 24-hour market. During each session, different financial institutions work respectively. European banks work during the London Forex session, and their actions affect the market during this period. Also, big players can move the market by creating a high level of supply and demand.
- Political situation. The international political situation affects the international economy. In case of unfavorable actions of a certain country, sanctions may be imposed on it, which will complicate its functioning and weaken the currency.
- General health of the economy. Perhaps the most obvious of all factors. The strength of the national currency is influenced by the strength of the economy. The most expensive and traded currencies on the Forex market are the currencies of countries with the most developed economies.
When the interest rate decreases, investment attractiveness decreases accordingly, so the exchange rate becomes lower. However, the central bank's ability to change the rate depends on a large number of factors. For example, with high unemployment rates, the rate is unlikely to be raised. This can lead to a further increase in unemployment because business lending becomes more expensive and it becomes more difficult to operate.
An increase in the discount rate should be expected if the country has a high level of inflation, but at the same time, unemployment rates are acceptable.
New trade alliances and agreements lead to the development of the economy and the strengthening of the currency.
The domestic political situation also greatly affects the currency value. The leadership may come to power with different plans for the development of the economy. Sometimes these plans can be more successful. And unsuccessful political decisions can lead to the collapse of the currency.
As you may have read, the Forex market is currently influenced by many factors, but it was not always like that. At the time of its birth, the market had a completely different appearance, and gold played a significant role in it. So in what follows, we will focus on the gold standard.
What is the gold standard?
In finance, the gold standard is a monetary system in which the value of a country's money is directly linked to a fixed quantity of gold. According to the gold standard, a country would exchange paper for gold at a fixed rate, and individuals would also be able to exchange their currency for gold. The gold standard was widely used in the 19th and early 20th centuries but was largely abandoned in favor of fiduciary money schemes.
What is the history of the Forex market?
The impetus for the emergence of the gold standard system was the industrial revolution in European countries and North America. The division of labor led to an urgent need for international trade. To make this process the most effective and simple, they began to use this system.
Internationally, the status of gold as the only international currency was established at the Paris Conference in 1867.
The main characteristic features of the Paris currency system were as follows:
- gold played the role of world money;
- import and export of gold were unlimited;
- regulation of the balance of payments balance was carried out at the expense of gold import and export;
- each national currency had a clearly defined gold content;
- national currencies are exchanged depending on their gold consistency.
The task of the state was to maintain the gold-to-currency ratio, which in turn narrowed the state's ability to intervene in the regulation of the economy through emission.
After the beginning of the First World War, this system began to change, and the gold standard turned into a gold currency standard. At that time, several currencies of the most developed countries were recognized as world currencies. This system is called the institutional system of the gold exchange standard, and it was approved at the Genoa Conference in 1922.
But already in 1944, this system was changed to the Bretton Woods system. The economies of European countries were greatly affected by the Second World War. And in 1944, this system was adopted. So the US dollar became the world currency. The US dollar had a fixed permanent exchange rate for gold. The dollar was worth a troy ounce. That is, one dollar was worth a little more than 30 grams of gold.
Moreover, people did not have the opportunity to exchange one currency for another. In order to buy francs, having only pounds, it was necessary to exchange pounds for dollars and dollars for francs. So it can be concluded that without the US dollar, no currency transaction was necessary.
Also, before, it was possible to exchange money for gold and gold for money. This became the reason for the end of the existence of this system. Because the state could not support such a ratio of gold to currency. And the person who broke this system became the president of France - Charles de Gaulle.
The National Bank of France had half a billion dollars in reserves, which at the exchange rate at the time was 16,500 tons of gold, three-quarters of all US gold reserves. It became clear that the US Central Bank could not perform this operation. This meant that the rules of this system were broken in 1965. And already in the 70s of the twentieth century, the then president of the USA canceled the gold currency standard.
Since that moment, the market has changed many more times, it was influenced by such factors as the appearance of the accessible majority of the Internet and private computers, online brokers, etc. The reformation of the Forex market began just then. And it was then that all these factors mentioned at the beginning began to affect the value of currencies because the currencies of developed countries currently have a floating exchange rate. And although many years have passed since the time of the gold standard and the Bretton Woods system, the dollar is still the most traded currency in the world.