Money Transfer History: The Foreign Exchange market is the world’s largest financial market, in excess of 1.5 trillion US dollars are being exchanged daily. This vast industry dwarfs the equity and bond markets ($60 billion daily) and moves with a volatility that is difficult to grasp, let alone predict.
The advance in global communications and electronic money movements has led to an exponential increase in volumes and speed at which this market operates.
The money transfer history began before World War One when the gold exchange standard dominated the international economic system. Under the gold exchange, currencies gained a new phase of stability at the time backed by the price of gold. It abolished the age-old practice used by kings and rulers of arbitrarily debasing money and triggering inflation.
The system was far from perfect; relying heavily upon flows of trade in and out of a country, while being slow to react to fundamental shifts in power and wealth. This led to economies becoming rapidly over inflated and then suddenly crashing without warning.
These boom-bust patterns prevailed throughout the gold standard until the outbreak of World War Two world interrupted trade flows and the free movement of gold.
After the Wars, Bretton Woods Agreement was founded, where participating countries agreed to try and maintain value of their currency with a narrow margin against the dollar and a corresponding rate of gold as needed. Countries were prohibited from devaluing their currencies to their trade advantage and were only allowed to do so for devaluations of less than 10%.
Into the 1950s, the ever-expanding volume of international trade led to huge movements of capital generated by post-war construction. This destabilised foreign exchange rates as setup in Bretton Woods.
In 1971 the Agreement was finally abandoned, along with US dollar being convertible into gold. By 1973, currencies of major industrialized nations floated with ease, as they were controlled mainly by the forces of supply and demand. Prices were floated daily, with volumes, speed and price volatility all increasing throughout the 1970s, giving rise to new financial instruments, market deregulation and trade liberalisation.
In the 1980s, cross-border capital movements accelerated with advent of computers and technology, extending market continuum through Asian, European and American time zones. Transactions in foreign exchange rocketed from about $70 billion a day in the 1980s, to more than $1.5 trillion a day two decades later.
London was, and remains, the principal offshore market. In the 1980s, it became the key centre in the inter-bank market when British banks began lending dollars as an alternative to Sterling in order to maintain their leading position in global finance. London’s convenient geographical location (operating during Asian and American markets) is also instrumental in preserving its dominance in the Foreign Exchange market.