Where did Forex come from, and why we should know about its evolution? Global Forex market daily turnover hits $6.6t in 2020. Impressive, isn't it? Even if you aren't a trader at all, you must have met the word Forex at least once. However, not many people know that despite its popularity foreign exchange market is a relatively young formation. Forex, the way we see it today, appeared only 47 years ago.
The exchange as a process dates back to the Babylon times. In this case, how has Forex been shaped over the centuries to become one of the biggest and most liquid markets of all time? The major global economic events have formed it!
History tends to repeat itself. The same events may occur in different forms but with a similar impact from time to time, changing the trading environment. To save your future self from the negative consequences, you have to know the past.
How it All Began
The first thing that comes to mind when talking about an exchange is the barter system. Appeared in about 6000BC this method of getting goods has evolved in the course of time. Salt and spices were the popular mediums for exchange, and they acted like ancestors of the first gold and silver coins.
A coin played a crucial part in that time and became a widely accepted medium of exchange because it was portable, durable, uniform, limited, and acceptable. However, golden coins varied in content and size, and it made a certain amount of difficulties - a recognized standard necessity appeared.
The Gold Standard Introduction
In the 19th century, several countries adopted the gold standard. The international payment through gold was affected by the supply and demand of the metal. Hence, this monetary system aimed to fix the domestic currency prices and guarantee their value.
This idyll was broken during World War I when more money was printed to cover all the expenses. Although the system was trying to come back between the wars, but it was no use. The gold standard became irrelevant and stopped being the ultimate monetary value form.
Forex Market Becoming
All the previous stages were just the preparation before FX was formed. At the beginning of the article, we've mentioned several major economic events that shaped the foreign market. Let's discover these highlights.
Bretton Woods System
World War II showed that the universal monetary system was highly needed. Countries wanted to have a stable environment for their economics to restore themselves. Therefore, in July 1944, the Allies representatives met in Bretton Woods to discuss the arrangement, which allowed economics to maintain worldwide trading with more effectiveness.
Bretton Woods discussion resulted in the following:
- Replacement of gold with the United States dollar – it became a primary reserve currency.
- Creation of the Forex exchange rate method.
- Establishment of the International agencies for controlling economic activity.
The agreement set the US dollar as the only currency against gold, and the other currencies were pegged against the US dollar. It stabilized the exchange market for a while. But it was impossible to cover the high greenback demand with limited gold reserves. The global economy slowed down, and the failure of Bretton Woods came to the fore. In August 1971, the US president refused the system.
When the Bretton Woods agreement ended, it became clear that the currency market constantly evolved into a free-floating one with exchange rates based on supply and demand. From that time, a new international financial system - or just the Forex market the way we have it today - was formed.
This major event had a strong connection with the UK financial problems in the 1970s. The country floated its currency to save the value, which led to the fact that other currencies started to lose positions. That was the reason why the European economies floated their currencies as well.
The floating exchange rate system allowed the government and the central bank to keep their currency price favorable for international trading or at least try to do that.
Online Trading Era
With impressive capital turnover, the free-floating market was popular among large companies, commercial funds, and banks. Mass growth of technologies and communication helped make exchange rates fairer while the developing Internet inspired banks to create their own trading platforms. Started from 1994, online trading became possible and any trader in the world has had access to the Forex market and traded regardless of time zone or location.
Since then, anyone can find a broker to their liking, register, and start trading right from their houses. Now any trader can choose a convenient option. Brokerage companies offer different account types with their own advantages and capabilities. For example, FBS has the Demo account where people can trade virtual funds in the real market conditions. They take no risks and train before real trading.
Technological development is so progressive now that traders are able to close and open orders not only in front of their computers but also with the help of their phones - mobile trading platforms give you such an opportunity. Just download the app and manage your orders right in it.
In the modern world, there is no problem to find any information on Forex trading. The multitude of various educational materials for traders of different levels is available for free - from online webinars and articles for newbies to economic news and trading tips from analytics.
Together with technical improvements, the Forex legislative base development also has gathered pace, especially in European countries. The regulators have introduced strict policies to provide traders with honest trading conditions and supervise broker transparency.
While the gold standard has gone, the golden age of a free international currency market with easy access for everyone has begun. Let’s enjoy it together!