Global Economy
October 14, 2013

Currency trading is the largest market in human history.

By Edward Gresser

THE NUMBERS: Annual currency trading –

2013 $1.950 quadrillion
2010 $1.460 quadrillion
2000 $0.547 quadrillion
1970 $0.006 quadrillion

WHAT THEY MEAN:

Money was invented by an anonymous genius (or sociopath, or both depending on your view) early in the 7th century BC. – most likely in the Kingdom of Lydia in modern-day Turkey, home to semi-legendary King Croesus, and quickly copied by neighboring Greece and Persia. The “money-changers” of the Gospels were a consequence of these innovations 6 centuries later: they swapped the Roman, Greek, and Persian coins carried by out-of-town pilgrims for half-shekel coins minted in Jerusalem and Tyre, with exchange rates depending on the quantities of precious metal contained in the coins, so that the pilgrims could pay the modest tax defray the expenses of Temple operations, along with food, shelter, and shopping during their stay.

This idea – currencies exchanged on the basis of a precious-metal value, with a small commission for the money-changer, to get local currency for foreign travel, imports, and debt payment – remained the basis of the for-ex business same as late as 1970. At that time the “Bretton Woods” currency system, set up in 1944 to replace the gold-linked Imperial Pound, (a) defined the value of gold as $35 per ounce; (b) linked other currencies to the dollar at fixed rates; and (c) allowed holders of any currency to exchange it for dollars or gold at this fixed rate. That year’s $6 trillion in currency exchange was more or less comparable to the $4 trillion world GDP.

The Bretton Woods system fell apart the following year. (Fixed dollar-rates meet inflation; too much gold flowing out of the U.S.; European countries refusing to change the currency rates; incipient panic.) Ever since, the values of most major currencies have been set by trading on international currency markets, and most trading is for hedging and futures markets rather than imports, travel, or debts. Over the ensuing decades, the for-ex business has become, by far, the largest market in the world and – whether measured by total value or compared to other activities – likely the largest market in human history.

The most recent triennial report on foreign exchange markets from Bank for International Settlements found $5.35 trillion in currency changing hands (metaphorically speaking) each day, or alternatively $1.95 quadrillion moving per year. Some particulars:

1.  Scale and rate of growth: Annual currency turnover reached $500 billion trillion in the early 1990s, and hit the $1 quadrillion mark around 2008. The BIS’ report suggests that this year’s total will top $2 quadrillion.

2.  Trading sites: Having lost its role as reserve-currency issuer in the 1930s, the U.K. has found a new one as the central for-ex trading site. City of London banks and firms handle 40 percent of all world currency trades, or about $800 trillion worth each year. New York ranks second with 19 percent of the for-ex business, or about $400 trillion annually; Tokyo, Singapore, Hong Kong and Sydney follow at about 6, 6, 4, and 2 percent. Over the last decade the British share of currency trade has risen (from about 32 percent to 40 percent), the U.S.’ has remained stable, the Japanese role dropped a bit, and the German role fell sharply.

3.  Currencies: The U.K. is the main trader; the U.S., the main source of currency. American dollars figured in 87 percent of all world currency exchanges in 2012 – a bit less than the 89.9 percent rate of 2001, but more than the 84.9 percent in the BIS’s 2010 estimates. In general, over the last decade dollar’s use in currency exchange has remains stable, while that of the euro has shrunk; and the yen and Australian dollar have gained share. Speculation about the Chinese yuan as a future reserve remains, well, very speculative. Used in 0.5 percent of exchanges in 2007, the yuan now appears in 2.2 percent – rising, but about equal to the shares of the New Zealand dollar and the Mexican peso, and offset by a modest decline in the transactional share of Hong Kong dollars.

To put this all in context, $2 quadrillion per year is 9 times the estimated $223 trillion value of total world household wealth (as estimated by Credit Suisse) in real estate, stocks, money, physical possessions and other assets; 30 times the $72 trillion world GDP of 2012; 80 times the value of 2012 goods and services exports; and 400 times the value of actually issued physical bills and coins of the sort carted around by the Jerusalem pilgrims. By another measure, somewhat arbitrary and accidental but still striking, currency exchange joins energy use in British Thermal Units as the only human activity counted in the quadrillions.

FURTHER READING:

Forex then and now –

Now – BIS’ 2013 report on the $2 quadrillion foreign exchange market of 2013: http://www.bis.org/publ/rpfx13fx.pdf

Before the flood – The Bretton Woods system, and the $6 trillion currency market of 1944-1971: http://www.polsci.ucsb.edu/faculty/cohen/inpress/bretton.html

At the Temple – John’s version of the Temple money-changers, with annotation by the U.S. Conference of Catholic Bishops: http://www.usccb.org/nab/bible/john/john2.htm

And the very beginning – The British Museum on the origin of money in the Kingdom of Lydia. Text with some lumpy-looking early Lydian coins (made of electrum, a mix of gold and silver), stamped with pictures of fish: http://www.britishmuseum.org/explore/themes/money/the_origins_of_coinage.aspx

Figures –

A comparative table, pitting for-ex vs. wealth vs. stocks vs. GDP; all figures are for 2012:

Annual currency trading: $1,950 trillion
Total individually held world wealth $223 trillion
World GDP $72 trillion
Global household debt $39 trillion
World goods/services exports $22 trillion
NYSE market capitalization $17 trillion
U.S. GDP $16 trillion
World foreign reserves $11 trillion
Coins & bills in circulation ~6 trillion
Dollars printed annually $0.4 trillion

* BIS for currency trading; Credit Suisse for world wealth; IMF for world GDP, world exports, US GDP, and world currency reserves; Federal Reserve for currency in circulation and U.S. annual currency printing; NYSE for market cap and stock turnover.

Some players —

The UK’s Financial Conduct Authority regulates the City of London, the world’s largest currency-exchange center: http://www.fca.org.uk/firms/markets/our-powers

And a journalistic look at U.K. for-ex firms: http://www.telegraph.co.uk/finance/personalfinance/expat-money/8292883/Currency-exchange-how-safe-is-your-money.html

The IMF’s surveillance branch: http://www.imf.org/external/np/exr/facts/surv.htm

The U.S. Treasury Department’s semi-annual currency trading reports on currency values and potential manipulations: http://www.treasury.gov/resource-center/international/exchange-rate-policies/Pages/index.aspx

A Deutschbank exec. speculates on the yuan as future global reserve: http://www.bloomberg.com/news/2013-07-03/nagel-says-yuan-has-potential-to-become-global-reserve-currency.html

GMO Click Securities, launched in 2005, is the largest ‘retail’ for-ex firm in Japan, sort of like day-trading: https://www.click-sec.com/global/en/

And a gossipy Time article on young Japanese women moonlighting (or more precisely, sunlighting) as forex day-traders: http://world.time.com/2013/08/09/handbags-and-champagne-japans-young-forex-divas-make-their-mark/

And two comparisons for context –

Governments now hold about $11.4 trillion in reserves, about ten times the $1.5 trillion held before the Asian financial crisis of the late 1990s. As in currency trading (but not quite as much, and not quite so certainly) most of this reserve money is, metaphorically, a big pile of dollars. Dollars make up $3.6 trillion of the $6 trillion in reserves which the International Monetary Fund is able to identify by currency, – i.e., 62 percent of the total. This is the same fraction as in 2010, but below the 67 percent for 2005 and the 71 percent in 2000. Euros account for 24 percent, sterling 3 percent, and yen 3 percent. Financial reserve data from the IMF, 1995-2013: http://www.imf.org/external/np/sta/cofer/eng/index.htm

And Credit Suisse estimates world household wealth at $221 trillion for 2012: http://economics.uwo.ca/news/Davies_CreditSuisse_Oct12.pdf