History of the Forex market: The Jamaican currency system. How Forex appeared.

By the end of the 50s - beginning of the 60s the balance of payments of the USA turned out to be negative in increasing frequency, gold reserves of the USA were exhausted, and the amount of dollars outside the country increased. Central banks of other countries created an increasing demand for gold, and the USA were obliged to satisfy it according to Bretton-Wood agreement. For the USA the necessity to exchange dollars for gold gradually resulted in detriment to the gold reserves (the USA had to sell gold at the fixed price of 35 dollars for ounce).

In August 1971 Richard Nixon (the president of the USA) cancelled the gold standard, and the limit of fluctuations of the face-value of currencies against the dollar was established at a level of 2.25 %. Currency markets were overwhelmed with a tide of instability.

The increasing of deviation interval of exchange rates up to 4.5% in December of the same year became the last attempt to keep Bretton-Wood system. However central banks could not keep this interval either, despite of massive interventions. Soon afterwards the USA declared devaluation of the dollar in 10 %.

In February 1973 the floating rate of the national currency was declared by Japan, and in March it was made by the European Union. Since this moment the mode of floating exchange rates became informally prevailing. The currency system passed in the category of "floating with the intervention of central banks" (dirty float). On the whole, it resulted in the increase of volatility of the world currencies.

In 1976 in Kingston (Jamaica) a new currency system was officially established and free fluctuation of exchange rates was legalized. In April 1978 a new charter of IMF came into force. There it was registered that the countries-participants of the fund can use floating exchange rates. Those countries which nevertheless left an affixment of national currencies to the dollar now established a corridor of fluctuations in 4.5 % and at any moment could pass to the mode of floating exchange rate.

In the basis of the new system refusal from the gold standard was incorporated first of all, no currency possessed gold content. Market of gold passed from the category of monetary one to the category of commodity. A new kind of international payment document was introduced - SDR (special drawing rights) - a unit of account of International monetary fund. Each country received share of SDR in conformity with its share in IMF.

However a number of countries continued the tradition of affixment of their national currencies to another currencies (some adhered their rates to the "baskets of currencies", 16 countries adhered their currency to SDR, 38 - to the dollar, 13 countries to the French franc, and 5 more countries to another currencies).

In 1978 nine participants of the European community established separate European monetary system which was "cross-rates scale" with boundary values. The system reminded of Bretton-Wood one, except that there was no gold in it, and instead of the dollar as reserve currency, the DM was used. Inside European monetary system (EMS) a new unit of account was introduced - European currency unit - ECU, which was founded on the basket of currencies of the countries-participants of the agreement. Borders of fluctuations for all currencies except for the Italian lira were established at a level of 2.25 %. In time ECU from a unit of account gradually changed into a physical one (circular cheques and deposits in banks appeared). In 1990 Great Britain joined the mechanism of exchange rates, and in 1992 after a significant collapse of pound sterling caused by speculative sales and inability of the Bank of England to keep the rate neither by interventions, nor by discount rate, the pound was removed from European monetary system. After the removal of the pound sterling from the agreement in 1993 in connection with strong devaluation of other European currencies the limit of fluctuations was increased up to 15 %.

In 1999 the Euro was introduced (instead of ECU). 11 states that satisfied certain parameters in inflation and deficiency of the state budget participated in the agreement.

On January, 1st, 2002 Euro was put into cash circulation that also considerably affected the currency market.