1.2 – History of the Forex Market

This forex course basics section covers the history of the forex market from prehistoric to modern times.

 

The foreign exchange market has existed in some form or another since tribal humans began doing commerce with members of other tribal groups.

When people of different lands and cultures needed to conduct commerce in antiquity, an agreement amongst both groups as to what would represent a medium of exchange was needed in order to facilitate commerce.

As society gradually progressed, and travel brought commerce to different lands, a need for a more formal system of exchange needed to be devised.

 

The Origins of Currencies

This led to the first monetary system, which consisted of precious metals such as gold and silver, as well as gemstones. These items were durable and reliable hard assets which had intrinsic value and therefore could be used among different people and cultures.

Eventually, more and more people observed the growing standard of exchange and coins began to be minted to represent the value of the precious metal they contained. Gold, copper and silver coins were the most commonly minted.

Nevertheless, as the practicality of physical gold and coins reached its limit, gold receipts — receipts for gold held on deposit — began to circulate as instruments of exchange. This eventually led to the printing of paper money backed by gold.

This led to what was to eventually become the gold standard for currencies which allowed for printed paper to be accepted as currency. This has now become the basis for the primarily paper monetary system in use in the world today.

 

The Gold Standard

 Modern history for the foreign exchange market began in the early 1800’s in England where the Gold Standard was officially adopted for the first time.

Even though gold had been used as a standard de facto currency for many years, England was the first nation to formally adopt a gold standard in 1821 after minting a gold sovereign coin in 1816.

Paper currency issued by governments operating under the gold standard generally had the feature of being immediately convertible to gold. Other nations soon followed England’s lead in adopting the gold standard and the world saw a semblance of peace during this period.

The Bretton Woods Agreement

As the world wars during the early 20th century often forced spending to exceed gold stores in affected countries, the gold standard was unfortunately suspended by most nations until the end of the Second World War when it was reinstated by the Bretton Woods Agreement.

 

The agreement was signed in 1944 by most of the world’s nations of the time in order to normalize broken economies after the war. The agreement, signed in the United States effectively brought the world back to the gold standard.

 

The agreement fixed gold at $35 U.S. Dollars per ounce, while also fixing all major world currencies to the U.S. Dollar. This also effectively made the U.S. Dollar the world’s leading reserve currency, a status that it enjoys to this day.

 

The Gold Standard Ends and Floating Exchange Rates Resume

 

By the early 1970’s, manipulation of the currency and gold markets forced the United States to end the U.S. Dollar’s convertibility to gold in 1971, thereby unilaterally removing the U.S. Dollar from the gold standard.

 

By 1973, most countries had allowed their currencies to float freely against the U.S. Dollar. This heralded the beginning of the modern era of largely free floating exchange rates.

 

European Union’s Euro and Online Trading in the 21st Century

 

The European Monetary Union that was established in 1999 consolidated the currencies of twelve European nations into one currency — the Euro.

 

The Euro has since then become the world’s number two reserve currency after the U.S. Dollar. In doing so, it followed in the footsteps of the German Deutschemark which formed a significant component of the Euro’s value.

 

In recent years, the increasing use of the Internet and the arrival of online retail forex brokers have given the opportunity to trade the forex market to just about anyone with a reliable Internet connection and a small amount of money.

 

Nevertheless, caution is strongly advised since trading in the forex market can be quite risky. As a result, a thorough understanding of the subject should be obtained before attempting to trade significant amounts.

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