A Brief History of Forex Currency Trading
The introduction of the gold standard monetary system in 1875 is probably the most significant event in the history of the currency markets. When countries fixed the price of their currency in terms of specified amount of gold (measured in troy ounces), the change of its value (price) compared to another currency became the first standardised means of currency trading in history.
World War I brought with it the breakdown of the gold standard because the major European powers did not have enough gold to exchange for all the money that their governments were printing at the time in order to complete large military projects. The time between the two world wars saw the gold standard being used again, but by the start of World War II, most countries had again dropped it. However gold never lost its spot as the ultimate form of monetary value.
In 1944 the Bretton Woods System was introduced. It led to the formation of fixed exchange rates that resulted in the U.S. dollar replacing the gold standard as the primary reserve currency. This also meant that the U.S. dollar became the only currency that would be backed by gold. In 1971 the U.S. declared that it would no longer exchange gold for U.S. dollars that were held in foreign reserves. This marked the end of the Bretton Woods System.
The breakdown of the Bretton Woods System ultimately led to the global acceptance of floating foreign exchange rates in 1976. This can be considered as the “birth” of foreign currency trading as we know it today, although it did not become widely traded, especially electronically traded, until the late 1990’s
In Forex trading, one party purchases a certain quantity of one currency by paying in a quantity of another currency. The Forex market is a global decentralised financial market for currency trading. Various financial centres around the world act as hubs for trading between different types of buyers and sellers, 24 hours a day, except for the weekends. It is the Forex market that determines the value of one country’s currency relative to another.
The primary reason for the existence of Forex trading is to facilitate international commerce and investment by giving businesses the ability to convert one currency into another. As an example, an American business imports goods from Germany and pays in euros, even though that business is based in America and transacts in U.S. dollars. Forex trading also provides a medium for speculation, which works to add deeper liquidity to the market, making exchange rates less volatile.