A Brief Look at Forex History

If that’s how you feel I won’t blame you, as I never was a big fan of history. However, having said that, I believe and am sure you will agree with me, that it’s always a plus to have some knowledge of the market that will, with time, become your best friend.

So, where did it all start?

It all began with the gold exchange, the so-called gold standard monetary system that was created in the mid 1870s. In the gold standard system, the government guaranteed that currency would be backed by gold. Thus, the major countries agreed to allocate an amount of currency to an ounce of gold.

It was an interesting concept where a strong economy would result in massive imports of goods and services from other countries. This would last until the gold reserves required to back its money decreased. Thus, money supply would plummet down pushing interest rates up and eventually slowing down its economic activity.

This situation would cause its goods and services to look cheap to the surrounding nations who would eventually buy those goods and services with the use of gold. Consequently, money supply will increase, interest rate will fall and economic activity will start increasing again.

Such an activity went on for decades until the gold standard broke down due to the World War 1.



The Bretton Woods Agreement

The Bretton Woods Agreement, which was signed in 1944, was aimed to establish an international monetary steadiness by preventing the outflow of money between neighboring countries. Signing the agreement meant that those countries agreed in maintaining the value of their currency to a narrow margin to that of the US dollar.

The US dollar from then became the primary reserve currency, making it the only currency that would be backed by gold.However, in the early 1970s, the agreement was abolished. Why?Simple, because the US did not have enough gold to cover all the US dollars foreign central banks had in reserve. A new system was born, the free currency trading among the major industrialized nations.

The free trade was ruled by the effect of supply and demand on the currency market. Prices were allowed to float daily, with volume, speed and price volatility plummeting to the sky. This gave rise to new financial instruments, market deregulation and the Forex trade liberalization.

With technological advancement in the 1980s, the cross border-capital movement was so big that it extended through time zones of Asia, US and Europe. From that day to now, the daily transaction has increased from US $70 billion to over US $2 trillion. It is the largest non-stop cash market you will ever come across.

And that is the end of our Forex history lesson.

To your success,

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