The Foreign exchange (or forex) market is the largest trading market in the world. A decentralized global market with a massive trading volume of $5 trillion, it is way ahead of other trading exchanges such as commodities and stocks. However, what do you think of its age? How old is it? 500 years? 200 years? No!
The open forex market, we trade, today is just 50 years old. Yes! And internet trading is only 30 years old. The story behind currency trading has much more twists and turns than this. In this article, we would take you on a fantastic historical journey of the foreign exchange market. How it started and evolved!
Currency Trading: History and Evolution
- The first standardized system for the exchange came in 1875, i.e. The Gold Standard. According to it, a nation can issue currency to the extent of its gold reserves.
- In other words, the country which has more gold reserves would be able to release more money.
- Before 1875, everyone relied on the barter system, which allows the exchange of one commodity for another, depending upon the value of the product.
- After some time, gold, silver, and copper started operating as exchange mediums. And as time passed, notes came into the game instead of metals, because of its noticeably low cost.
Forex Markets dates back to as old as 250 BC.
The first foreign exchange bank was established in Amsterdam but was not globalized.
- The gold standardized system also failed soon. In World War I, the countries needed so much currency, above their gold reserves, that this system happened to be a disaster.
- The money was required to purchase weapons, damaged properties, food, etc. continuously.
- After WWI, most countries dropped the gold standard system, but it was WWII that completely lost it.
- Before WWII was ending, the most powerful nations came together and set up a standard monetary system.
- Various plans, policies, regulations, and the formation of financial institutions were discussed there. More than 700 representatives from different countries participated in Bretton Woods.
The following were the result of the discussion in Bretton Woods:
- A new method of Foreign Exchange
- Formation of different monetary agencies to patrol international currency-related activities. Agencies were the International Monetary Fund (IMF), the International Bank for Reconstruction and Develop, and the General Agreement on Tariffs and Trade (GATT).
The US dollar would be the primary currency for the world and would replace the gold standard.
- However, making the US dollar a primary currency also didn’t go well. According to it, the US dollar would be the only foreign accepted worldwide currency.
- In other words, anyone or any country could exchange his gold with the US dollar, and that is precisely where it all went wrong.
- The US initially went very good, developed exponentially but later faced a significant mismatch between its gold reserve and the currency issued.
- The overdemand for the US dollar made this system fail. The rules of the Bretton Woods system became outdated.
- Later in 1971, the US government refused to exchange the Dollar for gold. The US president quoted that he wanted a free-floating currency market. Thus, the Bretton Woods system could not sustain that time.
- After then, a free-floating market was established, which we call the foreign exchange market today.
- According to it, demand and supply will decide the value of a nation’s currency, and an open monetary market was established.
- Also, before this free-floating exchange market, the exchange rate was determined by the government bodies of countries and was utterly centralized.
- However, the new system was decentralized and would work upon supply and demand.
- It also encouraged a healthy competition environment between countries. Every country worked towards making an action that was favorable for their currencies in the international market.
- The US dollar came as the strongest currency at that time because of its global presence. And, this global presence was due to that old system. Pretty unfair! Right…?
- With time, the market got developed. The forex market traders started earning from the changes in currency rates. Initially, before the internet, it was all offline trading and was only accessible only to certain places.
Most traders were big organizations and institutions at that time before the internet came.
- However, in the 1990s, the world got the internet. Thanks to some coding nerds, trading also started online.
- Trading brokers and platforms began operating on the internet, and it allowed the small investors to become ‘the retail traders’ with the help of brokers.
Banks started online trading platforms, but not for individuals.
- With the help of these internet platforms, anybody could see a bid and an ask price of any currency.
- And, then the rest is history. In no time, it became a full-time income-generating source for many people.
Isn’t the history of forex fascinating? How it started as a gold standard and went on to become a free-floating decentralized market, from the centralized one! Many people find it interesting.
And, the best part, after so many failures, disasters, and policy changes it is today the world’s biggest market. It operates 24/7, and is much more exciting, thanks to its volatility.
Forex still has a long way to go. But, you don’t have to worry about all this. Just make sure that you take the benefit. Trading forex is a great way to earn some extra bucks