Money transfer/ Remittance

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HISTORY OF FOREIGN EXCHANGE AND MONEY TRANSFERS

The foreign exchange market is the largest financial market in the world. Approximately 1.9 trillion dollars are traded daily in the foreign exchange market, which means it dwarves the stock market of any country, even the United States. Currencies are traded in different markets in various countries and thus currencies can be traded 24 hours, six days a week. The bulk of currency trading takes place in London and New York with Hong Kong, Japan and Singapore seeing the bulk of currency trading during Asian business hours.

Currency markets are also one of the most volatile markets. One of the reasons for this is the sheer size of the market, and its sensitivity to so many variables. Whereas a company trading on the stock market is susceptible to its own news and the health of the economy where it does business, there are many more variables that can affect currencies. International politics, enthusiasm for one currency that causes another to weaken even though there is no apparent reason for it, weather, and war - there is a virtually endless list.

Until World War I, currency markets were relatively stable. While different currencies and the need to exchange them had existed since the Babylonians (who are credited with the first use of paper notes and receipts), exchange rates were relatively stable. Speculation hardly ever happened, and certainly the enormous speculative activity in the market today would have been frowned upon. Most banking and government institutions, as well as the general public, regarded as speculating in currency as a negative thing - and preferred exchange rate stability.

Up until World War II, the British pound was the dominant world currency, and the one against which most other currencies were compared. The origin of the pound's nickname "cable" comes from the fact that the US Dollar was originally compared against it, and the US dollar and British pound were the first currencies traded by telegraphic cable. The British pound's day as the world's benchmark currency was eroded by Nazi Germany, which launched a massive counterfeiting campaign in World War II which saw shrinking in the confidence in the pound.

Meanwhile, the US dollar, which had lain in disrepute since the market crash of 1929, emerged from World War II as the currency of choice. The US economy was booming, and the United States emerged as a world economic power. Moreover, it was one of the few countries that hadn't felt the trauma of war on its shores, so its massive infrastructure was intact.

When the United Nations Monetary Fund convened in Bretton Woods, New Hampshire, representatives of the United States, Great Britain and France attended to work on a design for a new global economic order. The US dollar was now the world's benchmark currency, and it became the currency against which other nations would measure their own currencies as they struggled to rebuild themselves.

The world was in shambles - The Bretton Woods Accord established the policy of pegging currencies against the US dollar so as to bring stability to a fractured and volatile global economic situation.

The collapse of the Smithsonian Agreement and European Joint Float led to the birth of the free-float system - the system we know today. This was not a result of a plan or a design. The free-float system came into being because there were no other formal agreements to replace the Accords that collapsed, so the modern system was born by default.

The free-float system of currency trading works strictly on supply and demand and there are no limits on how much currencies can appreciate or depreciate in value measured against other currencies. Central banks and governments have tried to regulate the values of their currencies, but it has become an increasingly costly preposition.

Remittances occupy an important place at the intersection between finance and development. They form a financial stream coming from and going to mainly low-income markets/families in the developing world.

In the recent past, a growing number of countries including the United States have committed themselves to facilitating money transfers by immigrants/expatriates who send money back to their home countries.

The G8 Summit in 2004 called for efforts to reduce costs of money transfers and promote a greater role by banks and other financial institutions. All these happened in an era where money transfers were predominantly done by wire transfer firms. A substantial number of banks, non-banking financial institutions, remittance agents and moneychangers, along with a host of other businesses like Post Offices, Department Stores, Retail Chain Stores, Credit Unions, etc. have began focusing on the area of "Money Transfer" for a couple of years now. This increased emphasis on remittances has been due to the increased migration around the world for economic reasons.

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