Forex History

We have come a long way from the previously practised barter system to the modern day system of trading currency. Following is a brief summary of the evolution of currency and how it gave rise to Forex Trading. It can be illustrated as follows:
To explain this briefly,

  • The Ancient system of Trading - Trading with Gold
  • Gold Standard - Currency pegged to gold
  • Bank Notes Originated - Deposited Gold in banks in exchange for bank notes
  • Role of Geography - Various banks of different regions printed different currencies
  • Bretton Woods System - Currency pegged to USD
  • Birth of Floating Currency - Currency which is not pegged to any assets or other currencies is known as a 'floating currency'
  • But the most important factor in the formation of the forex market goes back to the period of the Bretton Woods agreement.
    Currency trading has its roots in the 1940s. During this time, the Bretton-Woods agreement was passed. The international currencies were becoming increasingly unstable due to World War II, and world leaders wanted to bring stability to the markets. This agreement was the first attempt by world governments to establish guidelines and regulations for national currencies around the world.
    The Bretton-Woods agreement tried to regulate currencies from fluctuating too much from regulated levels. The agreement provided for fixed exchange rates between currencies. It was designed to stabilize the international markets to promote free trade among the nations of the world.
    Prior to the Bretton Woods agreement, the world's major economies were backed by gold. As part of the agreement in 1944, a reserve currency was established to help countries maintain a fixed exchange rate that never changed more than 1%. The United States dollar was chosen as the reserve currency, and the United States agreed to make the dollar worth $35 per ounce of gold. Essentially, the world currencies were backed by the US dollar.
    While the agreement worked well for a time, this agreement also had flaws. The financial power of the world shifted to the United States after World War II, but European countries needed money to rebuild infrastructure destroyed during the war. The United States started providing grants to many of the European countries as it became the most powerful county in the world.

    The United States finally decided to stop backing the dollar with gold in 1971. People could no longer exchange dollars for gold. Supply and demand now fueled the world currencies, and the Forex market really began to take off.
    Emerging technology in the 1980s further propelled the Forex market as it made it easier for currencies to exchange hands. This has fueled the current explosion of trading in the Forex markets, and trading continues to increase every year.

    From its humble beginnings as an exchange of metal coins in Ancient Egypt to today’s electronic transactions of billions of dollars in milliseconds, the world of currency trading has changed a lot over the centuries, but the people’s need for trade and exchange has stayed the same.

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