09 Jun Forex trading – where did it all begin?
Forex trading is essentially the trading and exchanging of fiat currencies. A fiat currency is one that is formally regulated by a Government and established as the money of that country.
In this context, forex trading is centuries old. Experts believe it goes all the way to Babylonian times (roughly 1859 BCE to 539 BCE). Today’s forex market is one of the most important, most accessible and most liquid markets in existence. Whether you are already trading or considering learning how to, it’s interesting to find out how the market developed over the centuries.
Why learning the history of forex is a good way to learn how to trade
Today, forex refers to the foreign exchange market (also known sometimes as FX). For those people brand new to trading, the easiest definition is that it is the global marketplace by which traders exchange national currencies.
The global reach of commerce, finance and trade makes forex markets very liquid and very large. Currencies trade as exchange rate pairs against each other. And today’s forex market has been shaped by successive global events. For example, from around the mid-1940s to mid-1970s, the Bretton Woods Agreement and Bretton Woods System implemented a collective regime for international currency exchange.
The system involved a fixed currency exchange rate using gold as a universal standard. Representatives from 44 countries were involved and the process also created the World Bank and the International Monetary Fund (IMF).
Before the Bretton Woods Agreement, the gold standard was the accepted monetary system. The gold standard was phased out by Great Britain in 1931 and then by the US in 1933, with the final parts of the system completely abandoned by 1973. This system linked a country’s paper money or currency’s value to gold. The countries involved with the gold standard all agreed to convert their currency to a fixed amount of gold, and therefore this determines the value of the paper money used.
I think that aspiring (or even existing) forex trading should learn about its history and the main events that have dictated the market’s development. Not only does it give a good grounding for the market today, but it’s important to understand the kinds of events that could occur again and how they could also impact the market.
Back to the beginning – when did trading start?
Let’s go way back to when people started to trade. Probably the oldest method of exchange was the barter system, which historians tell us began in around 6000BC. It became the mainstay of Mesopotamia tribes, and was a simple system of exchanging goods in return for other goods.
Eventually specific goods like spices and salt became a popular way to exchange. By the 6th century BCE, gold coins were being produced and began to become a currency. This is largely because they were considered valuable because of limited supply, but they were also durable, divisible, uniform in size and portable. Gold coins slowly became accepted by most as the main exchange medium but were later considered too cumbersome.
Then came the previously described gold standard, which worked well for all countries until the first World War interrupted the system. While trading up until the 1930s was managed by the gold standard, it just couldn’t withstand the two world wars.
A brief timeline of the history of Forex trading
· 1819: England adopts the gold standard
· 1834: The US moves to gold standard from bimetallic standard
· 1870: Other major nations join the gold standard
· 1944: After the world wars broke the gold standard, the Bretton Woods system was established and went on until 1971
· 1973: The European Join Float system and the Smithsonian agreement both collapsed, which led to a switch to Free Floating system
· 1985: France, the US, Germany, the UK and Japan agree to depreciate the US dollar in the Plaza Agreement
· 1992: The Maastricht Treaty was signed, which ushered in the Euro and Eurozone.
· 1996: Internet trading began when the first online retail brokers launched.
A bit more on Bretton Woods
As I’ve already mentioned, this was the first significant and fundamental transformation of the forex market. Great Britain, the US and France designed the new global order at the UN Monetary and Financial Conference which was held in Bretton Woods.
They met in the year before World War 2 ended, when most European currencies were struggling while the US dollar had transcended 1929’s Wall Street Crash and ensuing depression to become the benchmark of the world. The idea of the Bretton Woods agreement was to return stability to the world so that nation’s economies could recover from the war and stabilise themselves by being pegged to a formal foreign exchange market. In 1971, President Nixon ended the accord, which led to foreign currencies free floating against the US Dollar.
What is the Free-Floating system?
Implemented in 1971, the Smithsonian Agreement was similar to Bretton Woods but was designed for more fluctuation between the currencies. The US pegged their dollar to $38/ounce of gold. The following year, European countries wanted to move away from being so dependent on the US dollar, which led to the European Joint Float launched by France, Italy, Luxembourg, Belgium, the Netherlands and West Germany. Both systems collapsed and failed by 1973, leading to an official system of free-flowing values.
Then came the Plaza Accord, established by the G5 in 1985. The G5 included the biggest and most powerful global economies – the US, France, Great Britain, Japan and West Germany. Representatives from the G5 met at the Plaza Hotel in New York City, where they announced the appreciation of non-US dollar currencies. This led to a plunge in value for the US dollar. Traders very soon spotted the many opportunities to make money from free floating currency trading.
The Eurozone and the Euro
Named for the city in the Netherlands where it was signed, the Maastricht Treaty established the European Union (EU). This included a new currency – the Euro – and the whole included loads of initiatives for member nations including for security and foreign policy.
The advent of Internet online trading
By the mid-1990s, global currency markets were faster, bigger and more sophisticated than ever before. Technology was changing access to the information needed to trade. Suddenly, people at home could find out an accurate price that not so long before would have needed a lot of brokers and traders to establish. This is when it all changed for forex trading. Currencies that were previously completely out of reach were able to be traded and emerging markets such as Southeast Asia began to flourish.
This timeline shows (albeit briefly) how a free market developed to create a hugely liquid marketplace. And now individual traders can compete using the exact same information and trading systems as merchants and international banks. And all of this is why the forex market has grown to become the biggest in the world.
To make money, retail traders need to stay one step ahead. Learning how to trade from a professional is a good first step. Understanding the right analysis and news to follow to ensure you’re totally informed is the next step. Start with the basics and go from there. Lots of people are making money this way, why shouldn’t you?