History of the Forex Market: How it All Began

Currency exchange is not new, it actually can be traced to the money-changers who were responsible in ancient times for the trading of currency. These money-changers would charge a small fee in order to help people change their currencies. Since most of history, money was referred to as gold and silver, and consequently goldsmiths were primarily the currency exchange dealers. This was necessary back then in order to facilitate trade.

Goldsmiths were also responsible for storing people’s gold, which eventually they created deposit recipients for the gold they stored to their owners. These receipts were the early days of “paper money” or currency.

Naturally, many goldsmiths became bankers due to gold being money and their ability to control gold. During a gold standard, all paper currencies are backed by a physical store of gold, and currency was pegged to the price of an ounce of gold.

Currency could be converted into gold at the fixed rate. In the US during the 19th century the rate was 20.67 USD / ounce of gold. In Britain it was set at 4.3474 GBP / ounce of gold. This gold standard imposed a limit on the expansion of the money supply. Countries were restricted on how much money can be created by the amount of gold was held in reserves.

Between 1914 and 1944, countries went in and out of the gold standard and currencies were permitted to fluctuate in terms of gold and each other. During World War II most currencies suspended their convertibility into gold. This was done primarily because military spending forced a drastic increase in the printing of currencies to help pay for the war.

Then in 1944 there was an important meeting held in New Hampshire in the United States in a little resort town called Bretton Woods. This meeting was the foundation for a new global monetary system, known as the ‘Bretton Woods System’.

This meeting established the IMF (International Monetary Fund) and the dollar-based international monetary system. Under this structure, the price of gold was fixed, and the U.S. agreed to buy and sell it at the established price. Other countries in turn pegged their currencies to the US Dollar (USD). By means of the USD, all currencies were pegged to gold.

The ‘Bretton Woods System’ was brought to an end on August 15, 1971 when President Nixon officially suspended all purchases and sales of gold by the U.S. Treasury.

The demise of the ‘Bretton Woods System’ unofficially marked beginning of the modern foreign currency exchange market. Within a couple of years, supply and demand were controlling the exchange rate between currencies. An increase in price volatility, volume and speed all led to the deregulation of the market, new financial instruments and open trade.

It wasn’t until around the mid-nineties that the Forex became widely traded electronically.