Although currency trading has existed for some time now, the modern Forex market as we know it is relatively new. It has ballooned from $500 billion in 1988 to $5.3 trillion today and is popular among traders as a fluid and secure market due to its flexible nature.
Currency trading developed these characteristics after a sequence of events beginning from the adoption of the Gold Standard by the United Kingdom in 1819. Let’s take a look at some amazing facts:
- The Gold Standard
Our contemporary concepts of Forex Trading were first seen in the United Kingdom’s adoption of the Gold Standard. Under this new system, governments tied the value of their currency directly with gold kept in reserves. Basically, currency was just a tool that represented the actual gold in the vault.
After the United Kingdom, more countries soon followed in adopting the Gold Standard. And soon, the differences in the value of currencies arose as some countries had less gold in their reserves than others, which compelled them to place a higher value on an ounce of gold than their peers. This gave birth to currency exchange, with the difference in value becoming the exchange rate.
- World War
However, with the advent of World War I, the Gold Standard was abandoned by many European superpowers as the escalating costs of the war compelled countries to print more money than the gold in the reserve represented.
Later, the Gold Standard never had enough time to make a comeback as the Great Depression and World War II once again compelled countries to print sums of money that were disproportional to the gold in their vaults.
As the dust was clearing over the cities of Europe and Asia post World War II, currency exchange was becoming a necessity as the United States of America provided funds for reconstruction and relief. The collapse of the Gold Standard meant that there was no uniform monetary policy that united the global economy and hindered the ability of currency conversion.
- Bretton Woods
Devising a monetary policy was an urgent task for countries of the post-War era. Representatives met in Bretton Woods, New Hampshire, in 1944 and implemented an economic system that used the U.S. Dollar as a benchmark for other currencies. In turn, only the dollar would be backed by Gold Reserves.
Many important organizations were the result of this agreement such as; the International Monetary Fund (IMF) was set up provide loans to war-torn countries; the General Agreement on Tariffs and Trade (GATT) which was a precursor to the present day World Trade Organization (WTO).
But it would still be decades before the modern Forex market would start developing. The dependence on the U.S. Dollar made speculative investment difficult and impractical.
This agreement had many glaring errors which would eventually lead to its collapse in the 1970s. The U.S government was facing obstacles in keeping a proportional amount of gold in its reserves to the amount of currency being circulated. Bear in mind, this meant that all currencies dependant on the dollar as a benchmark were being affected.
Thus, it was one of American history’s most unpopular President who gave us our modern monetary system. In order to control inflation, he dropped the agreements of Bretton Woods and that gave rise to free-floating or ‘fiat’ currency, whose value is impacted by market conditions. This established the fluidity that Forex trading thrives on and since then, Forex trading has become the largest trading market in the world.
- Technology Age
Forex trading in the 21st Century has shaped to become one of the most sought after market among investors. With the advent of the internet, the rapid delivery of news and information has created a market with high volatility which allows for massive gains in a small amount of time.
Originally, currency trading was done over phone or transacted between large banks. But the lucrative opportunities of this market led to entrepreneurs introducing social trading networks that harness the internet’s capabilities to allow traders to share information among themselves, at a pace that was fast enough to keep up with the Forex market’s liquidity.
These trading groups have only become more popular among investors with 53% all Forex trading being done though them since 2008.
It was this order of events that today has given us an open and free market which utilizes the tools of its era. Financial social media is shaping to become the future of Forex trading and the statistics demonstrate that brokers agree.