History of Forex Trading

To trace the history of Forex trading back to its roots, you have to travel back into ancient times. Before currencies were developed, people traded using a barter system. Instead of paying for goods and services with money, they would provide a good or service of equal value instead. However, this method of exchange was limited and a better system eventually developed. In fact, money as we know it today has been around since the Babylonians, and there is archaeological evidence of them using receipts and keeping account ledgers. In the beginning, people used common items as money, including things like stones or even teeth! Over time, these fell out of use and precious metals become the currency of choice.

Why was this? Not only were the materials rare, making them more intrinsically valuable, they could be carried easily and were durable too. Also, through the minting process their weight could be precisely controlled, making each coin worth the same amount. This was an important development, as before only an approximate value was possible. Coins were used for centuries, but they eventually gave way to printed notes as legal tender. In fact, this was first seen in the Middle Ages, with the government backing paper certificates. Today every modern nation on the planet produces a printed currency, and it is the accepted practice.

The Gold Standard

In 1875 the gold standard was implemented, and it is a prominent landmark in Forex trading. Prior to this policy, countries would often trade using precious metals rather than printed money. In simple terms, the government decided to back each printed bill with a specific amount of gold. If you wished, you could turn your printed tender over to the bank, and receive an equal value in gold.

How does this pertain to Forex trading? With multiple countries' currencies backed by the same precious metal, gold became a standard by which to judge them. An exchange rate system developed, which was reported in terms of how much currency it took to purchase one ounce of gold. This was the first time that currency exchange was standardized, and it represented a huge step forward into modern times.

Why was this system abandoned? World War I caused many nations to massively expand their military spending, and there simply wasn't enough gold to back up these expenses. Rather than limit their building efforts, many countries decided to do away with the gold standard instead. While it did make a brief reappearance after the war, World War II sealed its fate.

Bretton Woods

Without the gold standard, a new system needed to be put into place, to ensure global stability and trade. In response to this need the Bretton Woods system was enacted, which was a joint venture of more than 700 representatives from allied nations. It was given this title because their meeting took place in Bretton Woods, New Hampshire in 1944. It covered many different aspects of foreign exchange and currency valuation. These included making the US dollar the reserve currency of the world, replacing obsolete gold. Also, three separate organizations were created, the General Agreement on Tariffs and Trade, the International Bank for Reconstruction and Development and the International Monetary Fund. They also agreed on a technique for creating exchange rates as well.

However, Bretton Woods had one inherent flaw, which the creators overlooked! They established the US dollar as the world's reserve currency, but it was still backed by gold. At the time, it was felt that this backing would create stability, yet they were badly mistaken. Due to every nation in the world needing reserves, eventually America did not have enough gold to meet the demand for printed notes. This problem eventually came to a head on August 15, 1971 when President Nixon took us off the gold standard, making the US dollar a fiat currency. This is defined as a promise to pay, backed only by the people's confidence in the government's ability to bring in income through taxes.

Free-Floating System

With the collapse of Bretton Woods a new system was needed, and this came in the form of the Smithsonian Agreement in 1971. This did not limit the rate as much as Bretton Woods did, but it did not succeed. Another unsuccessful attempt was the European Joint Float, whose aim was to reduce Europe's use of the dollar as a reserve.

Finally, after several years of turmoil, the Jamaica Agreement was established in 1976. This policy removed gold as the standard permanently, and enacted a free-floating system. However, in actuality most governments still manage their currency to some extent, and typically use one of three exchange rate systems. These are termed as dollarization, pegged rate and managed floating rate.

Forex Trading Today

While this history is interesting, how can you make a profit from this information? Forex traders exploit the movements of currencies today, as they "float" independent of one another. The ability to do so has only been available since the late 70's, when the free-floating system was put into place. Now currencies around the globe fluctuate in value, depending upon the two factors of supply and demand. For years Forex trading was open only to banks and large institutions, but in 1995 it finally became available to individuals as well. You can now access the Forex market online, right from your personal computer.

How can you make a profit? You pick out currency pairs, and then determine your profit by the difference in price which arises. For example, if were bullish on the US dollar, you might combine it with a currency you felt was weaker such as the British Pound Sterling or Swiss Franc. With currency values moving everyday, the potential to profit is truly enormous, and this makes this investment vehicle exciting!

No central trading location is required, as the Interbank Foreign Currency Exchange is the hub for all activity. This exchange receives online trades from around the world, so no trading floor is needed. With this instant transmission of information, this market moves quickly and it is one of the most accurate exchanges today.

So, now you know the history of the Forex market, both how it came to be and how to profit from it today. With market changes happening every minute, you are afforded the chance to profit constantly! So, why not get in on the action yourself, and start trading the Forex online?