Forex History

In order to understand the nature of forex, it is useful to examine the reasons that lead to its existence in the first place.

The detailed historical events that shaped the foreign exchange market are of no great importance to the forex trader. We happily omit the lengthy details. Instead, we provide a specific insight into the reasoning behind foreign exchange as a medium of exchange for goods and services.

Originally, our ancestors traded goods against other goods. This system of bartering was quite inefficient. It required lengthy negotiation before a deal could be struck. Eventually, precious metal like bronze, silver and gold came to be used to facilitate the exchange of goods. The public accepted those mediums of exchange mainly because they were durable and capable of being stored. Eventually, during the late middle ages, a variety of paper IOUs became popular as an exchange medium.

The obvious advantage of carrying around 'precious' paper versus carrying around bags of precious metal was slowly recognized through the ages. Eventually, stable governments adopted paper currency and backed the value of the paper with gold reserves. This came to be known as the gold standard. The Bretton Woods accord of 1944 fixed the dollar to 35 USD per ounce and other currencies to the dollar. In 1971, President Nixon suspended the convertibility to gold and let the US dollar 'float' against other currencies.

Since then, the foreign exchange market has developed into the world's largest market with a total daily turnover of about 4 trillion USD.

The primary market for currencies is the 24-hour Interbank market. It is open around the clock. The trading day begins in New Zealand and moves around the globe as the business day begins in each financial center, first to Sydney, Tokyo, London, and New York.

Until recently, the small trader had no access to the forex market. With large minimum transaction sizes and stringent financial requirements, banks, hedge funds, major currency dealers, and wealthy individual speculators were the principal participants.

While FOREX has been traded since the beginning of financial markets, online currency trading has only been active since about 1996. This was made possible through technology expansion and the growth of the internet.