Forex, also known as foreign exchange market, is the largest financial market in the world, with an estimated daily trading volume of $6.6 trillion. But how did this market come into being? In this article, we will explore the history of forex and how it was created.
The origins of forex trading can be traced back to ancient times, when traders exchanged goods and currencies across borders. However, it was not until the early 20th century that the modern forex market began to take shape.
In 1900, the gold standard was established, which meant that currencies were valued in terms of gold. This system allowed for greater stability in international trade, as currencies were pegged to a fixed rate of gold. However, the gold standard was abandoned during World War I, and it was not reinstated until after the war in 1925.
During the 1920s and 1930s, the forex market began to take shape as a result of the increased international trade and investment. In 1931, the British pound was devalued, which led to the creation of the first forex market, where traders could exchange currencies at a floating exchange rate.
The Bretton Woods System
In 1944, the Bretton Woods Agreement was signed by 44 countries, which established a new global monetary system. Under this system, the US dollar was pegged to gold at a fixed rate of $35 per ounce, while other currencies were pegged to the US dollar. This system allowed for greater stability in international trade and investment, but it also led to the growth of the forex market as traders could exchange currencies at a fixed exchange rate.
The collapse of the Bretton Woods system in 1971 marked a significant milestone in the history of forex trading. In response to the US inflation crisis, President Richard Nixon announced that the US would no longer exchange dollars for gold, effectively ending the gold standard. This decision led to the creation of a floating exchange rate system, where currencies were valued based on supply and demand in the market.
The Birth of Electronic Trading
The 1980s marked a new era in the forex market, with the introduction of electronic trading. Prior to this, trading was done over the phone, which was slow and inefficient. With the advent of electronic trading platforms, traders could now place trades instantly and more efficiently.
The first electronic trading platform was created by Reuters in 1987, which allowed traders to access real-time currency quotes and execute trades electronically. This was followed by the creation of other electronic trading platforms, such as EBS and Bloomberg, which further revolutionized the forex market.
The Rise of Retail Forex Trading
In the 1990s, the forex market was primarily dominated by large financial institutions and banks. However, with the advent of the internet, retail forex trading became more accessible to individual traders. This led to the growth of online forex brokers, which allowed traders to open trading accounts with small amounts of capital and trade from anywhere in the world.
The popularity of retail forex trading has continued to grow over the years, with an estimated 10 million retail traders around the world. Today, the forex market is a truly global market, with traders from all corners of the world participating in it.
In conclusion, the history of forex trading is a fascinating one, with its roots dating back to ancient times. The modern forex market has come a long way since the gold standard and the Bretton Woods system, with the advent of electronic trading and the rise of retail forex trading. Today, the forex market is a truly global market, with an estimated daily trading volume of $6.6 trillion.
