How did Forex start? History of the foreign exchange market

History of Forex Trading

Forex trading is a legalized global business of exchanging different world currencies and other financial instruments that ought to be centuries old. Its earliest beginning dates back to the Babylonian period when trading through the barter system was practiced as a means of exchange.

The general conception is that Forex trading started in Amsterdam roughly 500 years ago. Beginning in Amsterdam, Forex trading then spread further throughout the whole world. Today, the forex market is one of the largest, most liquid and accessible trading markets globally. The industry had undergone several major shifts in the past, gaining shape through critical global events like the barter system, gold coin standard, Bretton Woods Monetary Conference, and the floating method.

forex history

History of Currency Trading & Forex Market

When did Forex trading start?

  • Barter System

The trade by barter system is the oldest method of exchange, dating back to 6000 BC and is often seen as the building block behind the formation of forex trading in the later years. Under the barter system, goods were exchanged for other goods. The plan later evolved, and goods like animal hides and skin, salt and food spices which were of high demand, became popular mediums of exchange. However, the 6th century BC observed the production of gold coins. Thus, gold coins adopted the role of currency for its portability, divisibility, uniformity, limit of supply, namely significant characteristics of money today. Indeed, the concept went on to replace the barter system.

  • Gold Coins Standard

Most countries adopted the gold standard at the tail end of the 18th century. The gold standard guaranteed that the government would pay any amount of paper money for the equal price of gold, which worked well until the first World War struck. European countries were forced to suspend the gold standard to fund the war by ramping up printing paper money. Hence the need for each country to develop their fiat currencies arose at this point. Therefore, paper money was bound to be printed by each country as their means of exchange.

  • Bretton Woods Monetary Conference (1944 – 1971)

The Bretton Woods Monetary Conference, held in Bretton, was one of the most significant events in history that helped to standardize the Forex Market as we have today.

After World War II, the G3 comprising the United States, Great Britain, and France met at the United Nations Monetary and Financial Conference in Bretton Woods to fashion a new global economic order. The chosen location at the time was simply because the US being the only country not heavily affected by the war. Most of the major European countries were in shambles during this period. WWI transformed the US dollar from a failing currency after the stock market crash of 1929 to a yardstick currency by which other international currencies would subsequently be compared against.

Following this, other countries were required to establish an exchange rate based on the relative exchange rate of the US Dollar to the home currency. Nevertheless, the US dollar could not subdue gold as it held the highest amount of substantial reserves globally. To this end, they instead attached a higher importance to gold against the dollar exchange rate. The dollar as the standard unit of exchange would lead to the creation of a free-floating system.

  • Formation of Free-Floating System

Oppositions to the dollar dominance brought about by the Bretton Woods Accord led to the Smithsonian Agreement in December of 1971. This session allowed for a greater fluctuation band for the currencies. The United States pitched the dollar to gold at the exchange rate of $38/ounce, thereby depreciating the dollar. Under the Smithsonian agreement, other major currencies could fluctuate by 2.25% against the US Dollar. The US Dollar has a pair of gold.

  • The Plaza Accord

By the end of the early 1980s, the weight of the US dollar was crumbling the economies of the third-world nations under debt and closing most European factories because they could not compete with other foreign competitors.

Consequently, in 1985 the G-5, the most powerful economies in the world comprising the US, Great Britain, France, West Germany, and Japan, came together and sent representatives to what was known as a secret meeting at the Plaza Hotel in New York City. News of the meeting leaked, forcing the G-5 to make a statement encouraging the appreciation of non-dollar currencies, including the Euro, yen and pounds. This was therefore known as the ‘Plaza Accord’.

Who controls the Forex market?

Forex Trading Today

With the advent of the internet, forex trading would immediately spread like wildfire across various countries. The banks played significant roles in standardizing today’s forex market by providing necessary liquidity to exchange and trade multiple currencies.

Next, to enable the individual to trade in the forex market without going to the bank to place their orders, the need for digital financial intermediaries linking the individuals to the Forex market arose. This gap is today filled by brokers. Today an individual can use the smartphone to create a trading account with any given broker and freely participate in the global foreign exchange market.

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