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Forex history is a fascinating subject that many traders do not even
think about. Forex has evolved massively in the last few decades but
the development of currency trading goes back a long way.

Early in the history of humanity there was no currency. People would
exchange goods and services based on whatever value those things had
to them. Pretty soon, however, most societies moved to a system where
all goods and services were valued in terms of one particular range of
items which became the currency. This might be precious stones, beads
or teeth, but in most parts of the world metals such as gold and
silver were used.

Metal coins had the advantages of being easy to store, easy to weigh
and therefore regulate, and difficult to mine and copy so that the
market would not be flooded. Nevertheless they were inconvenient for
large payments to or from governments and kings. Soon, paper currency
began to circulate. This would originally be in the form of written
notes or IOUs promising to pay a certain amount of money. Eventually,
most countries established central banks to produce and regulate the
national currency. This was the beginning of forex history.

Until World War I it was always theoretically possible to go to the
central bank and ask for gold or silver in place of your bank notes.
Of course, this very rarely happened in significant amounts and many
national banks stopped keeping enough gold to cover. Occasionally,
however, such as in Germany after World War I, there would be a
disastrous run on the banks, leading to crazy inflation and the
collapse of the national economy. This was a major factor in the rise
of the German Nazi party and therefore could be said to have caused
World War II.

To prevent a similar disaster happening in a vulnerable nation again,
the Bretton Woods agreement was drawn up in 1944. This ‘permanently’
pegged all national currencies to the US dollar, and fixed the value
of the dollar against gold at $35 per oz. Around the same time, the
International Monetary Fund and World Bank were created to assist in
maintaining international economic stability.

This held until the early 1970s. However, nations were developing at
different rates and in different directions, and in 1971 President
Nixon suspended the gold standard. The US dollar was dropped as a
reference point for most of the major national currencies, and the
relative values of different currencies began to fluctuate according
to economic conditions and market forces.

Suddenly it was possible to trade in currencies, and the financial
institutions were quick to recognize the potential. Banks had to
exchange money to supply their customers with foreign currencies for
travel and importing goods, but pretty soon they were exchanging far
more than they needed in order to profit from the continual rise and
fall in the values of the different currencies.

Gradually, private investors joined in the game and the forex market
mushroomed. The development of the internet meant that the market
became accessible to anybody, in theory. To accommodate the huge
numbers of potential new clients and because their costs were
dropping, brokers began reducing the minimum investment amount. At
this point in forex history, daily trading turnover has reached
between $3 and $4 trillion, more than the trading volume of all of the
world’s stock and bonds markets added together.