The origins of Forex
The modern international currency trade is only 42 years old, but in 2019 this market reached a daily turnover of $6.6 trillion (the estimate for 2020 is $10 trillion!). The single decision to remove the US dollar from the gold standard resulted in the creation of the world’s largest market. We believe that every trader should know the origins of Forex. Read on to learn more about the market you’re trading in, and what it has to do with President Nixon.
It is common knowledge that the international currency market Forex emerged after countries removed their national currencies from the gold or the US dollar. Officially, this took place in 1978 when the IMF ratified the Jamaica accords of 1976. But the history of currency exchange had gone through several phases before that.
Gold means stability
Obviously, currency exchange between countries existed in ancient history, as well as in the Middle Ages. However, international currency relations didn’t become structured and regulated until after the Napoleonic Wars the 19th century. The first global monetary system was the gold standard, it remained active up to the WW1. Every country based its national currency on gold reserves, and the exchange rate depended only on the amount of gold behind the money. The most important trading pair was GBP/GOLD, since the pound sterling was the primary reserve currency in the most countries.
The volume of a country’s gold reserves was changing slowly, so the currency rates remained stable, and the inflation was barely there. Speculating on currency prices would have been a pointless business.
With the onset of the First World War, the US dollar starts gradually replacing the pound as the world’s main reserve currency. In 1929, the Great Depression forces the UK, and then the US to abandon the gold standard and make their currencies free-floating.
Violations of the previous international accords during the two world wars and the Great Depression necessitated the development of a new currency market system. In 1944, the dollar standard (still tied to gold) was established at the Bretton Woods conference.
The Bretton Woods system existed for 27 years. In 1971, in response to an economic crisis, the US President Richard Nixon decided to stop backing the dollar with gold. A few years later, the fixed exchange rate system was completely canceled by the members of IMF with the Jamaica Accords, ratified in 1978.
Modern international currency market
The final abandonment of the gold standard, and the emergence of currency exchange at free prices, regulated only by the laws of supply and demand, triggered an unheard-of volatility of all national currencies. That’s how Forex was born — a free market, fertile ground for speculation and making money. George Soros became the first major speculator who made $2 billion from just one trade in 1992. However, at the start of the new currency age, market speculation was available only to those with colossal amounts of funds, millions and billions of dollars: governments, large banks, major investors. Central banks and large commercial banks account for the lion’s share of the trading volume.
However, individuals soon also began gradually gaining access to the young and quickly developing market to speculate on currency prices. Brokers and dealing centers emerged, who provide access to the market for a fee. They serve as conductors to the world of currency speculation with unlimited volume: it’s possible to trade with as little as $10 in your account.
Moreover, individuals can now choose a convenient option of work with the broker: there are different types of accounts, each with its own advantages and possibilities. For instance, Standard accounts are known for the low commission, while Swap Free exempts you from fees for the transfer of medium- and long-term positions through the midnight.
Meanwhile, the spread of the Internet allowed trading on a computer instead of a telephone. New technology sped up and significantly simplified the technical side of trading. Moreover, previously it was necessary to read newspapers and seek for insights using personal connections to get the information needed for a successful trade, now the global economic news available to everyone makes individuals and financial analysts of prime brokers (banks or large investment companies) equal in terms of informational resources.
It’s also worth noting that free Forex trading educational materials and videos, as well as daily trading ideas have become quite easy to find in recent years. The gold standard has gone for good, and the age of free international currency market is here, available to everyone, even with the minimum investment.
