Foreign exchange history is a fascinating subject that many traders do not even think about. Foreign exchange has evolved colossally in the last few decades but the development of foreign exchange trading goes back a great distance.
Early in the history of humanity there wasn’t any currency. People would exchange goods and services primarily based on whatever price 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 special range of items which became the currency. This could be precious stones, beads or teeth, but in most parts of the planet metals such as silver and gold were used.
Metal coins had the benefits of being simple to store, simple to weigh and therefore regulate, and tricky to mine and copy so the market wouldn’t be flooded. Nevertheless they were inconvenient for huge payments from or to presidencies and kings. Soon, paper currency started to circulate. This would originally be in the shape of written notes or ious promising to pay a specific quantity of money. Eventually, most states established central banking institutions to produce and regulate the national currency. This was the start of foreign exchange history.
Till World War I it was always in theory possible to go to the central bank and ask for gold or silver in place of your bank notes. Naturally, this very seldom occurred in heavy amounts and many nationwide banks stopped keeping enough gold to cover. Infrequently nevertheless, such as in Germany after World War I, there would be a catastrophic run on the banks, leading to crazy inflation and the downfall of the national economy. This was an important element in the upward thrust of the German fascist party and so may be said to have caused WWII.
To prevent a corresponding disaster taking place in a vulnerable country 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. Round the same time, the world financial Fund and World Bank were made to help in maintaining international business stability.
This held until the early 1970s. However, countries were developing at different rates and in different directions, and in 1971 President Nixon postponed the gold standard. The US dollar was dropped as a reference point for almost all of the major countrywide currencies, and the relative values of different currencies started to vary according to economic conditions and market forces.
Suddenly it was possible to trade in currencies, and the fiscal institutions were quick to recognize the potential. Banks had to exchange money to provide their clients with foreign currencies for travel and importing goods, but pretty soon they were exchanging much more than they required so as to profit from the continual rise and fall in the values of the different currencies.
Continuously, personal investors joined in the game and the currency market mushroomed. The development of the Net meant the market became accessible to any person, in principle. To house the big numbers of potential new clients and because their costs were dropping, brokers commenced reducing the minimum investment amount. At about that point in currency exchange history, daily trading turnover has reached between $3 and $4 trillion, more than the trading volume of all the world’s stock and bonds markets added together.
