History of Foreign Exchange

The history of foreign exchange is quite different from any other financial market in the world. A wise man once said,

"Never forget the importance of history. To know nothing of what happened before you took your place on earth, is to remain a child for ever and ever."

To paraphrase that to fit our purposes...if you know nothing of how the Forex market got to where it is today, you'll always be nothing but a rookie. Here are the basics of Forex history and how the market got started.

The Gold Standard

You've probably heard the term "The Gold Standard" when referring to something that is the best of the best. The Gold standard was actually a currency system that originated in 1875. At that time, countries decided to peg the value of currency to gold. This created currencies that were backed by gold. For each dollar or other currency that was printed, the country had to have a certain amount of gold sitting in a vault to back it up.

Bretton Woods System

During World War I and World War II, countries were strapped for cash. The United States, Germany and some other countries involved in the wars temporarily got away from the gold standard and printed up more money so they could finance the wars.

In 1944, 700 representatives from the Allies got together and decided to come up with a financial system that all of the major countries that participate in. They created a system of fixed exchange rates for currencies. They also replaced the gold standard with the United States dollar and made it the global reserve currency. All other currencies were simply pegged to the value of the dollar.

Bretton Woods also led to the creation of the International Monetary Fund or IMF, the International Bank for Reconstruction and Development and the General Agreement on Tariffs and Trade.

Floating Exchange Rates

In 1971, Richard Nixon formally announced that the United States would no longer accept dollar bills for gold. This was the first step in abandoning the Bretton Woods system. Then in 1976, the Jamaica agreement officially put to an end the Bretton Woods agreement across the world and led to a system of floating exchange rates.

Since that point, currencies have floated in value against one another and fluctuate based on the strength of the economy that prints the money. Factors such as retail sales, interest rates, housing numbers, non-farm payroll and other items affect the value of currencies.

The Forex Market

After the Bretton Woods system was abandoned, the only primary players in the Forex market were institutional investors and banks. You had to have very large amounts of money to trade.

Then in 1994, the first online Forex exchange came about. After that point, Forex brokers started to open up. With Forex brokers, the average person could get involved because they could trade with leverage. You no longer had to put up hundreds of thousands of dollars to trade the market.

The Market Today

Today, the Forex market is the largest financial market in the world. During a normal day, more than $4 trillion will pass through the market between its various participants. So why is the history of foreign exchange important to you? It means we've come a long way from the gold standard and if you can even get a tiny fraction of that $4 Trillion every day, you're going to be sittin' pretty. Now start checking out the rest of the site and learn to day trade Forex so you can start bringing in some extra cash.

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