There were two monetary standards – the so-called “gold standard” used in countries like Great Britain and bimetallism used in the United States and in countries belonging to the Latin Coin Union. However, the disadvantages of bimetallism caused the gradual spreading of gold currency. As part of the gold standard, notes could be exchanged for an appropriate amount of gold on the client’s request to the central bank of a particular country.
World War I was the end of this type of exchange as people came back to exchange notes for metal, nevertheless, in a limited way. That is why notes weren’t exchanged for gold coins but for bullions (the gold bullion standard) or for other currency that could be exchanged for gold (gold exchange standard).
The definitive end of exchange and metal currency was brought by the Great Depression 1929-1933. In 1944 at the conference in Bretton Woods in the United States, the International Monetary Fund – the organization designed to stabilize the international monetary system – was founded.
The system that was established in the strength of resolutions form the Bretton Woods conference was called the “dollar standard” and was aimed at mutual currency interchangeability according to a constant rate of exchange with 1% tolerance. It was necessary to define currency value in gold but it wasn’t necessary to exchange it for gold.
Most of western European currencies reached full interchangeability in 1958. The system was used till the beginning of 1970s when it was abolished releasing currency rates, which was then regulated only by forces of demand and supply.
It was with few or no restrictions, currency exchange rates began to change fluently and this created many investing and speculating possibilities Over the next 30 years, currency exchange turnover expanded significantly. Daily turnover soon reached 5 billion dollars and then reached 600 billion dollars in 1987 to become more than 1 trillion dollars in 1992, finally reaching around $1.2 trillion daily.
Such dynamic growth was caused by many factors.
The most important were: technological development, growing incomes of central banks and bigger rivalry on imports and exports. The development and the use of the Internet and computers in trading caused higher interest in not only forex but also others capital markets.
We can see that the Forex market is very young – about 30 years old – and this means that it is one of the youngest capital markets. It can be perceived as a paradox that forex although is so young and at the same time the biggest and the most popular of markets nowadays.