The way of trading fiat currencies Forex is centuries old and dates back to the Babylonian period. Forex is one of the most promising and liquid markets Several major global events, like the Bretton Woods system and the gold standard have shaped the Forex market into what it is today.
To trade forex proficiently, traders must know the history of this market. History repeats itself. The history of an asset has greater significance to technical analysis that enables traders to make rational market decisions. Similar trends tend to happen in the market, just their pattern and form change over time.
How the Journey for Forex Trading Began?
As per Historians, Mesopotamia tribes introduced a barter system around 6000 BC. In this system, goods were exchanged for goods from one person to another. Further, this system took a forward leap, and salt and spices were used for exchanging goods. These were the first forms of foreign exchange.
Introduction of gold coins was one of the greatest achievements. Coins were portable, durable, uniformed and acceptable, which increased speed of transactions and made them a better choice for trade and exchange. Eventually, these were produced in the early 6th century BC and gained acceptance.
Before the 1800s, gold coins remained the medium of exchange, but their weight remained an issue. Countries in the 1800s adopted the gold standard, leading to the introduction of paper money. The governments backed the paper money introduced, and they redeemed any amount of money for its value in gold. This system remained intact till World War I. The cost of the war was too much to bear for either country, and they further could not hold to the gold standard.
Events That Caused Progress and Shaped the Forex Market
Here are some of the events that have evolved the Forex market and have facilitated the environment that we observe today:-
- The Bretton Woods System 1944 – 1971: Bretton Woods System was introduced around the end of World War II. The United States, Great Britain, and France met at the United Nations to design a new economic world order. WWII made the U.S. dollar a benchmark currency, which further was used for every international transaction. Bretton Woods Accord intending to create a stable market for global restoration, created an adjustable pegged foreign exchange. Through the same, a currency was fixed to another currency. As the era’s top performer, the U.S. dollar was used as the first reserve currency for international exchange. It was also because the U.S.A. held the most gold reserves. The system failed because the gold reserve was insufficient to back the U.S. dollars in circulation. In 1971, President Richard M. Nixon ended the Bretton Woods system.
- The Free-Floating System: The end of the Bretton Woods Accord allowed a greater fluctuation in the band of currencies. The U.S. dollar was further pegged to gold at the rate of 38 per ounce, and it depreciated the dollar. As per the Smithsonian agreement, other currencies can fluctuate against the U.S. dollar by 2.25%. This system also collapsed in 1973. It enabled a free-floating system to grasp the global economy as a new change.
- Plaza Accord: Early 1980s was the golden phase of the U.S. dollar, which appreciated greatly against other currencies. It was due to the increased rates by Paul Volcker. In 1985 G-5 countries made a statement to counter the depreciation of non-dollar currencies. It caused a steep fall in the dollar. This fluctuation enabled traders and investors to realize this market segment’s opportunities.
- Online Trading: It is one of the major revolutions that has affected several market segments; likewise, Forex also changed with the same. The system of online forex trading was introduced in the 1990s. Since then, it has evolved a great deal, enabling traders to make rational trade decisions using a device of their preference.
Foreign exchange has evolved greatly from salt and spice as a way of trading to 7.5 trillion dollars of daily transactions. The enhanced forex markets keep improving, and online trading channels offer traders a more sophisticated environment for trading.