It’s vital for forex traders to know the history of forex trading, and the key historical events that have shaped the market. This is because similar events could happen again in different, but comparable ways – influencing the trading conditions. History tends to repeat itself.
THE FOREX TRADING HISTORY: THE ORIGINS
The oldest way of exchange is the barter system, which started in 6000BC, introduced by Mesopotamia tribes. Under the barter system, goods were traded for other goods. The system then evolved and goods like salt and spices became common means of exchange. Ships would sail to trade for these goods in the first form of foreign exchange. Eventually, as early as 6th century BC, the first gold coins were made, and they acted as a currency because they had the essential characteristics like portability, durability, divisibility, uniformity, limited supply and acceptability.
Gold coins were widely used as a means of exchange, but they were inconvenient because they were heavy. In the 1800s countries adopted the gold standard. The gold standard ensured that the government would exchange any amount of paper money for its value in gold. This worked well until World War I where European countries had to suspend the gold standard to print more money to pay for the war.
The foreign exchange market was supported by the gold standard at this point and during the early 1900s. Countries traded with each other because they could convert the currencies they received into gold. The gold standard, however, could not sustain during the world wars.
KEY EVENTS WHICH HAVE INFLUENCED THE FOREX MARKET
Throughout history, we have seen important events that have had a significant impact on the forex trading environment. Here are some highlights:
THE BRETTON WOODS SYSTEM 1944 - 1971
The Bretton Woods System was a major transformation of the foreign exchange market that took place near the end of World War II. The United States, Great Britain, and France met at the United Nations Monetary and Financial Conference in Bretton Woods, NH to design a new global economic order. The US was chosen as the location because it was the only country that had not been damaged by the war. The Bretton Woods Accord aimed to create a stable environment for global economies to recover by establishing an adjustable pegged foreign exchange market. This meant that foreign countries would fix their exchange rate to the US Dollar, which was pegged to gold. However, the system eventually failed because there was not enough gold to back the amount of US Dollars in circulation. In 1971, President Richard M. Nixon ended the Bretton Woods system, leading to the free floating of the US Dollar against other foreign currencies.
THE BEGINNING OF THE FREE-FLOATING SYSTEM
In December 1971, the Smithsonian Agreement was established, which was similar to the Bretton Woods Accord but allowed for greater fluctuation of currencies. The US pegged the dollar to gold at $38/ounce, depreciating the dollar. Other major currencies could fluctuate by 2.25% against the US Dollar. In 1972, some European countries established the European Joint Float to reduce their dependency on the US Dollar. However, both agreements failed and collapsed in 1973, leading to an official switch to the free-floating system.
THE PLAZA ACCORD
In the early 1980s, the US dollar appreciated greatly against other major currencies, making it difficult for exporters and causing a deficit in the US current account. To combat stagflation, Paul Volcker raised interest rates, strengthening the US Dollar but decreasing the competitiveness of US industry in the global market. This put pressure on third-world nations and closed American factories. In 1985, representatives from the G-5 met at the Plaza Hotel in New York City to address this issue. News of the meeting leaked, forcing the G-5 to make a statement encouraging the appreciation of non-dollar currencies. This became known as the Plaza Accord and caused a sharp decline in the dollar. Traders soon realized the potential for profit in currency trading due to fluctuation, even with government intervention.
ESTABLISHMENT OF THE EURO
After WWII, Europe established many treaties to bring countries closer together, including the 1992 Maastricht Treaty, named after the Dutch city where the conference was held. This treaty established the European Union, created the Euro currency, and included initiatives on foreign policy and security. The formation of the Euro removed exchange risk for European banks and businesses in an increasingly globalized economy.
THE INTERNET TRADING
The 1990s was a decade of transformation for the currency markets, as money and its usage evolved. A person at home could easily get a precise price that would have taken many traders, brokers, and phones to obtain before. This was possible because of the improved communication technology that coincided with the rise of capitalism and globalization (the collapse of the Berlin Wall and the Soviet Union).
Forex was affected by these changes as well. Currencies that were once isolated in authoritarian regimes became tradable. Developing markets, especially in Southeast Asia, prospered, drawing capital and currency speculation.
The history of forex markets since 1944 shows a clear example of a free market at work. Competition has created a marketplace with unmatched liquidity. Spreads have decreased significantly with more online rivalry among reliable participants. Individuals trading large sums now have access to the same electronic communications networks used by international banks and merchants.
FOREX TRADING TODAY AND IN THE FUTURE
The forex market is the biggest market in the world today. Every day, more than $5 trillion is exchanged on the forex market. The future of forex is uncertain and constantly changing, creating endless opportunities for forex traders.
Forex traders need to keep up with the changes in the market to succeed.
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