As early as the 6th century, gold acted as a universal currency. It had all the crucial characteristics like divisibility, homogeneity, acceptability, and limited supply. However, gold is heavy and it was deemed impractical from a logistical point of view.
This led to a series of events that created a formal monetary system for all the major global economies and created the forex market as we know it today.
Where it all began
The 1800s saw the creation of the gold standard. This standard guaranteed that a government could redeem any amount of paper money for its value in gold. England adopted the gold standard in 1819, America in 1834, and other major economies soon followed suit.
The forex market was backed by the gold standard into the early 1900s, however, the standard couldn’t hold up during the world wars and European countries suspended it in order to print more money to pay for the war.
The Bretton Woods System and its failure
In July 1944, towards the end of WW II, Great Britain, France, and the US met at Bretton Woods to design an environment in which global economies could be stabilised. The Bretton Woods Accord created an adjustable pegged forex market by fixing other currencies to the US Dollar. This allowed foreign countries to transact in US Dollars.
Other currencies were pegged to the US Dollar because the US held the most gold reserves in the world at the time. The agreement started to fail, however, as governments increased lending and spending and the amount of US Dollars in circulation increased. There wasn’t enough gold to peg to the circulating US Dollars, and in 1971, the Bretton Woods system ended and prompted the free-floating of the US Dollar to other foreign currencies.
The official switch to the Free-Floating System
In December 1971, the Smithsonian Agreement came into effect. The US Dollar was pegged to gold and other major currencies could fluctuate by 2.25% against the US Dollar.
The European community tried to cut dependency on the US Dollar by establishing The European Joint Float. Unfortunately, this system was flawed just like the Bretton Woods Accord and it collapsed in 1973. There was an official switch to the free-floating system using the US Dollar.
The Plaza Accord
The free-floating system worked until the early 1980s when the US Dollar appreciated greatly against other major currencies at the expense of the US industry’s competitiveness in the global market. The heightened weight of the dollar crushed developing nations under debt and in 1985, the most powerful economies in the world met secretly at the Plaza Hotel in New York City to encourage the appreciation of non-dollar currencies.
News of the meeting leaked and the meeting became known as the Plaza Accord. At this point, traders realised the potential profit to be made from currency trading as the currencies fluctuated.
The Maastricht Treaty
As other countries adopted the Plaza Accord, the European community still wanted to bring its region together without relying on the dollar. Many treaties were designed but none were as prolific as the Maastricht Treaty of 1992. This treaty established the EU and led to the establishment of the Euro currency. The formation of the Euro removed exchange risk for European banks and businesses and gave them a distinct edge in an ever-globalised economy.
Forex and the internet boom
Up until the mid-1990s, the currency markets were slow. Getting an accurate price required an army of brokers and traders but the mid to late 1990s brought the internet and advances in communication that changed everything.
The currency markets became more sophisticated and convenient. Banks created their own trading platforms and retail brokers introduced internet-based trading platforms for individuals. Currencies were no longer shut off in political systems and emerging markets like those in Southeast Asia thrived.
The current forex trading landscape
The internet created a market with unparalleled liquidity. Today, the forex market is the biggest market in the world, handling over $5 trillion in trades daily. Traders now have access to various trading platforms and technology that helps them make better trades. It’s an exciting time to be in the forex market.
The future of forex Forex has a long history and its future holds much potential for success. Already, digital currency trading is growing and many technological advancements are taking place and presenting perpetual opportunities for forex traders.