The Gold Standard: Beginnings of the Forex Market

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The current forex market is a sophisticated global system powered by the latest in computer technologies and networks. Money is usually not literally printed, but instead is created digitally via cyberspace and computers. However, there was a time when the value of currency had a more integral connection with the physical world. The first global monetary system based the value of currencies in physical gold.

Creation of the Gold Standard

The gold standard was the first standardized system of international currency exchange. Before the gold standard was created in 1875, countries would usually utilize gold and silver for international payments. The gold standard is based upon guarantees from governments to honor requests to convert a currency into specified amounts of gold. Every major economic nation defined a specific amount of its currency as equal to one ounce of gold.

War vs. Gold: Abandoning the Gold Standard

When governments back their currencies with gold it creates a large demand for gold reserves in order for international currency exchanges to continue operating. However, the demand for gold eventually exceeded available supply during the early part of World War I. This stemmed from European nations engaging in large-scale military projects due to political tension across the continent.

These military projects required large financial investments from European governments. This need for financing caused the governments to increase currency printing. Eventually, this resulted in European governments printing money excessively until the limited supply of gold was not adequate to cover the excess currency.

After the end of World War I, the gold standard made a short-lived comeback. However, most governments abandoned the gold standard upon the beginning of World War II. On the other hand, gold is still considered a valuable metal and is one of the most heavily traded commodities.

Writer Bio

LeBach PhamLe Bach Pham has been writing professionally after receiving his Bachelor’s of Art in English Literature from the University of California, San Diego in 2002. He now specializes in writing about legal, business and financial topics. Pham also earned a Paralegal Certificate from the University of San Diego and has experience working in the legal field. He also has experience in writing business plans for clients from various fields, including banking, finance, retail, education, beauty and various other sectors.

Sources:

  • http://www.investopedia.com/university/forexmarket/forex4.asp
  • http://www.investopedia.com/terms/g/goldstandard.asp

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