Forex history is a fascinating subject that many traders do not even think about. Forex has evolved massively in the last few decades but the development of currency trading goes back a long way.
Early in the history of humanity there was no currency. People would exchange goods and services based on whatever value those things had to them.
Pretty soon, however, most societies moved to a system where all goods and services were valued in terms of one particular range of items which became the currency. This might be precious stones, beads or teeth, but in most parts of the world metals such as gold and silver were used.
Metal coins had the advantages of being easy to store, easy to weigh and therefore regulate, and difficult to mine and copy so that the market would not be flooded. Nevertheless they were inconvenient for large payments to or from governments and kings.
Soon, paper currency began to circulate. This would originally be in the form of written notes or IOUs promising to pay a certain amount of money.
Eventually, most countries established central banks to produce and regulate the national currency. This was the beginning of forex history.
Until World War I it was always theoretically possible to go to the central bank and ask for gold or silver in place of your bank notes. Of course, this very rarely happened in significant amounts and many national banks stopped keeping enough gold to cover.
Occasionally, however, such as in Germany after World War I, there would be a disastrous run on the banks, leading to crazy inflation and the collapse of the national economy. This was a major factor in the rise of the German Nazi party and therefore could be said to have caused World War II.
To prevent a similar disaster happening in a vulnerable nation again, the Bretton Woods agreement was drawn up in 1944. This ‘permanently’ pegged all national currencies to the US dollar, and fixed the value of the dollar against gold at $35 per oz.
Around the same time, the International Monetary Fund and World Bank were created to assist in maintaining international economic stability.
This held until the early 1970s. However, nations were developing at different rates and in different directions, and in 1971 President Nixon suspended the gold standard.
The US dollar was dropped as a reference point for most of the major national currencies, and the relative values of different currencies began to fluctuate according to economic conditions and market forces.
Suddenly it was possible to trade in currencies, and the financial institutions were quick to recognize the potential. Banks had to exchange money to supply their customers with foreign currencies for travel and importing goods, but pretty soon they were exchanging far more than they needed in order to profit from the continual rise and fall in the values of the different currencies.
Gradually, private investors joined in the game and the forex market mushroomed. The development of the internet meant that the market became accessible to anybody, in theory.
To accommodate the huge numbers of potential new clients and because their costs were dropping, brokers began reducing the minimum investment amount.
At this point in forex history, daily trading turnover has reached between $3 and $4 trillion, more than the trading volume of all of the world’s stock and bonds markets added together.
