History of the Forex

Money, in one form or another, has been used by man for centuries. At first it was mainly Gold or Silver coins. Goods were traded against other goods or against gold. So, the price of gold became a reference point. But as the trading of goods grew between nations, moving quantities of gold around places to settle payments of trade became cumbersome, risky and time consuming. Therefore, a system was sought by which the payment of trades could be settled in the seller’s local currency. But how much of buyer’s local currency should be equal to the seller’s local currency?

The answer was simple. The strength of a country’s currency depended on the amount of gold reserves the country maintained. So, if country A’s gold reserves are double the gold reserves of country B, country A’s currency will be twice in value when exchanged with the currency of country B. This became to be known as The Gold Standard. Around 1880, The Gold Standard was accepted and used worldwide.

During the first WORLD WAR, in order to fulfill the enormous financing needs, paper money was created in quantities that far exceeded the gold reserves. The currencies lost their standard parities and caused a gross distortion in the country’s standing in terms of its foreign liabilities and assets.

After the end of the second WORLD WAR the western allied powers attempted to solve the problem at the Bretton Woods Conference in New Hampshire in 1944. In the first three weeks of July 1944, delegates from 45 nations gathered at the United Nations Monetary and Financial Conference in Bretton Woods, New Hampshire. The delegates met to discuss the postwar recovery of Europe as well as a number of monetary issues, such as unstable exchange rates and protectionist trade policies.

During the 1930s, many of the world’s major economies had unstable currency exchange rates. As well, many nations used restrictive trade policies. In the early 1940s, the United States and Great Britain developed proposals for the creation of new international financial institutions that would stabilize exchange rates and boost international trade. There was also a recognized need to organize a recovery of Europe in the hopes of avoiding the problems that arose after the First World War.

The delegates at Bretton Woods reached an agreement known as the Bretton Woods Agreement to establish a postwar international monetary system of convertible currencies, fixed exchange rates and free trade. To facilitate these objectives, the agreement created two international institutions: the International Monetary Fund (IMF) and the International Bank for Reconstruction and Development (the World Bank). The intention was to provide economic aid for reconstruction of postwar Europe. An initial loan of $250 million to France in 1947 was the World Bank’s first act.

Under the Bretton Woods Exchange System, the currencies of participating nations could be converted into the US dollar at a fixed rate, and foreign central banks could convert the US dollar into gold at a fixed rate. In other words, the US dollar replaced the then dominant British Pound and the parities of the world’s leading currencies were pegged against the US Dollar.

The Bretton Woods Agreement was also aimed at preventing currency competition and promoting monetary co-operation among nations. Under the Bretton Woods system, the IMF member countries agreed to a system of exchange rates that could be adjusted within defined parities with the US dollar or, with the agreement of the IMF, changed to correct a fundamental disequilibrium in the balance of payments. The per value system remained in use from 1946 until the early 1970s.

The United States, under President Nixon, retaliated in 1971 by devaluing the dollar and forcing realignment of currencies with the dollar. The leading European economies tried to counter the US move by aligning their currencies in narrow band and then float collectively against the US dollar.

Fortunately, this currency war did not last long and by the first half of the 1970’s leading world economies gave up the fixed exchange rate system for good and floated their currencies in the open market. The idea was to let the market decide the value of a given currency based on the demand and supply of the currency and the economic health of the currency’s nation. This market is popularly known as the International Monetary Market or IMM. This IMM is not a single entity. It is the collection of all financial institutions that have any interest in foreign currencies, all over the world. Banks, Brokerages, Fund Managers, Government Central Banks and sometimes individuals, are just a few examples.

This is very much the present system of exchange of foreign currencies. Although the currency’s value is dependent on the market forces, the central banks still try to keep their currency in a predefined (and highly confidential) fluctuation band. They accomplish this by taking one or more of various steps.

The International Trade Organization that had been planned in the Bretton Woods Agreement could not be realized in the form initially envisaged - the US Congress would not endorse it. Instead, it was created later, in 1947, in the form of the General Agreement on Tariffs and Trade, which was signed by the US and 23 other countries including Canada. The GATT would later become known as the World Trade Organization. In recent years, the two international institutions created at Bretton Woods the World Bank and the IMF have faced a major challenge in helping debtor nations to get back on stable financial footing.

A major catalyst to the acceleration of Forex trading was the rapid development of the Eurodollar market; where US dollars are deposited in banks outside the US. Similarly, Euromarkets are those where assets are deposited outside the currency of origin. The Eurodollar market first came into being in the 1950s when Russia’s oil revenue - all in dollars - was deposited outside the US in fear of being frozen by US regulators.

That gave rise to a vast offshore pool of dollars outside the control of US authorities. The US government imposed laws to restrict dollar lending to foreigners. Euromarkets were particularly attractive because they had far less regulations and offered higher yields. From the late 1980s onwards, US companies began to borrow offshore, finding Euromarkets a beneficial center for holding excess liquidity, providing short-term loans and financing imports and exports.

London was, and remains the principal offshore market. In the 1980s, it became the key center in the Eurodollar market when British banks began lending dollars as an alternative to pounds in order to maintain their leading position in global finance. London’s convenient geographical location (operating during Asian and American markets) is also instrumental in preserving its dominance in the Euromarket.

Only in the 20th century paper money start regular circulation. This happened by force of legislation, the efforts of central banks to manage money supplies, and government control of gold supplies.
Within a country, this fiat money is as good as any other form. Internationally, it is not. International trade has always demanded a money standard accepted everywhere.
Gold and silver provided such a standard for centuries. An official Gold Standard regulated the value of money for about a century, prior to the start of World War I in 1914.
1929
The dollar has been perceived as more of a has-been, due to the Stock Market Crash and the subsequent Great Depression.
1930
The Bank for International Settlements (BIS) was established in Basel, Switzerland. Its goals were to oversee the financial efforts of the newly independent countries, along with providing monetary relief to countries with temporary balance of payments difficulties.
1931
The Great Depression, combined with the suspension of Gold Standard, created a serious diminution in foreign exchange dealings.
World War II
Before World War II, currencies around the world were quoted against the British Pound. World War II crashed the Pound. The only country unscarred by the war was the US. The US dollar became the prominent currency of the entire world.
1944
The United National Monetary and Financial Conference at Bretton Woods, New Hampshire discussed the financial future of the post-war world. The major Western Industrialized nations agreed to a «pegging» of the US Dollar, which in turn was pegged at $35.00 to the troy ounce of gold. The future was designed to be stable, in part due to the tight governmental controls on currency values. The US dollar became the world’s reserve currency.
1957
The European Economic Community was established.
1967
At the IMF meeting in Rio de Janeiro, the Special Drawing Rights (SDRs) were created. SDRs are international reserve assets created and allocated by the IMF to supplement the existing reserve assets.
1971
The Smithsonian Agreement, reached in Washington, D.C., had a transitional role to the free floating markets. The ranges of currencies fluctuations relative to the US dollar were increased from 1 percent to 4.5 percent band. The range of currencies fluctuating against each other was increased up to 9 percent. As a parallel, the European Economic Community tried to move away from the US dollar block toward the Deutsche Mark block, by designing its own European Monetary System.
In the summer of 1971, President Nixon took the United States off the gold standard, and floating exchange rates began to materialize.
1972
West Germany, France, Italy, the Netherlands, Belgium and Luxembourg developed the European Joint Float. Member currencies were allowed to fluctuate within 2.25 percent band (the snake), against each other and 4.5 percent band (the tunnel) against the USD.
1973
The Smithsonian Institution Agreement and the European Joint Float systems collapsed under heavy market pressures. Following the second major devaluation in the US dollar, the fixed-rate mechanism was totally discarded by the US Government and replaced by The Floating Rate.
1978
The International Monetary Fund officially mandated free currency floating.
1979
The European Monetary System was established.
1999
January 1st, 1999, the Euro makes its official appearance within the countries members of the European Union.
2002
January 1st, 2002, the Euro becomes the only currency and replaces all other twelve national currencies within the European Union and Monetary Market: Belgium, Germany, Greece, Spain, France, Ireland, Italy, Luxembourg, Netherlands, Austria, Portugal and Finland.

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It is good to know & appreciate the history of forex which is quite desirable for a forex trader! Of these, the evolutions of forex brokers are also important as they brought the platform to access the forex market with low capital requirements. But some forex brokers are there only to cheat. I still remember how I lost around $300 in IronFx when they freeze and later deleted my account!

I've never known that forex has such a long history. I used to think that this financial market appeared in 1960-s. Thank you for clueing me in.

I had been learn how to trade forex online and I remember about of history is: Over the next 25 or so years, the system ran into a number of problems. By the early 1970s, U.S. gold reserves were so low that the U.S. Treasury did not have enough gold to cover all the U.S. dollars that foreign central banks had in reserve.

Finally, on August 15, 1971, U.S. President Richard Nixon closed the gold window, essentially refusing to exchange U.S. dollars for gold. This event marked the end of Bretton Woods.