History of the FOREX Market

Most people, eager to start trading immediately in hopes of quick profits, tend to overlook the historical background of Forex. But as in any other field, the key to success in this market fundamentally relies on familiarizing oneself with the elements of the currency exchange world. One of these elements is history.

Here, we will briefly highlight some of the most important milestones that contributed to the creation of the foreign exchange market.

Gold Standard – 1875
This year marked one of the most significant events that opened the curtain for the modernization of the economic world. It saw the establishment of the international monetary system, which would now use gold as a unit of measure. Setting gold as the universal standard of value paved the way for globalization and the financialization of the economy. Before the implementation of this system, different countries used gold and silver as a means of payment for international transactions. However, the value of gold and silver fluctuated according to supply and demand mechanisms. In other words, when new gold mines were discovered, the value of gold would decrease due to the increased supply in circulation. This issue acted as a catalyst for the creation and implementation of a standardized system for valuing gold.

A fixed and guaranteed value for exchanging gold with physical goods became the concept that led to the standardization of gold value. Later, paper currency was introduced by central banks worldwide, backed by a specific amount of gold bullion.

1913 – Creation of the Federal Reserve (FED)
This financial institution now dictates global fiscal policies.

1944 – The US Dollar becomes the world’s central currency
From this point, all international trade was linked to the currency issued by the FED, giving it dominance over the global economy. The major change in the new currency system was the replacement of the gold standard with the US dollar, making the dollar the primary reserve currency. To support global economic activity, three international institutions were formed:

• International Monetary Fund (IMF)

• International Bank for Reconstruction and Development (IBRD)

• General Agreement on Tariffs and Trade (GATT)

These three organizations later contributed to the creation of the World Trade Organization (WTO), which still exists today.

1980 – Present
Telecommunications and a global increase in paper money supply enabled speculation in currency markets. The foreign exchange market began to expand, with the US dollar as the dominant currency, due to other world currencies being pegged to it. This is why all major currency pairs include USD. The market continues to grow due to rapid societal awareness and easy access.