It’s often been said that in order to look to the future, we must examine the past and, with so much in the forex world depending on a trader’s ability to anticipate markets and geo-politics, it is helpful to understand how the concept of forex began. Here we take a short look at the history of this multi-billion pound industry.
Forex Before 1973
The history of trading goes back as far as the history of mankind. Notes, as we know them were introduced in the Middle Ages to enable merchants to pay for goods which led to the earliest known forex trading.
From then, right up until World War I, forex markets continued steadily despite a lack of speculative activity. However, after the First World War, the markets became unstable and speculation increased even though this was frowned upon by banks, governments and the general public. The worldwide depression during the late 1920s, together with the elimination of the gold standard in 1931 caused the forex market to decrease in activity. This lull continued until 1973.
The Bretton-Woods Accord
The Second World War was the starting point for the currency markets as we know them today. Due to economic instability and a counterfeiting effort by the Nazis to undermine the British pound, the UK currency was in disarray. Leaders of the USA, Britain and France met at Bretton Woods in New England to establish an accord to stabilise the global economies. It was as a result of this meeting that the International Monetary Fund (IMF) was established.
Prior to this, the British pound was the currency against which most other currencies were compared. Now, however, they became pegged to the United States Dollar and only allowed to fluctuate within a set limit on either side of this agreed standard, with national banks intervening when these limits were approached. The US Dollar was also pegged to gold prices, at $35 an ounce, in the hope of offering further stability to world currencies and forex trading. The Bretton Woods Accord eventually failed in 1971 but not before achieving what it set out to do which was restore economic stability in Europe and Japan.
The Smithsonian Agreement
In December 1971, the Smithsonian Agreement, which was the successor to the Bretton Woods Agreement came into force. It was comparable to Bretton Woods but allowed currencies greater fluctuation. In 1972 another initiative, the European Joint Fund, was established with the aim of moving European currencies away from their dependency on the dollar by allowing even greater fluctuations.
Both agreements collapsed in 1973 and the system was allowed to free-float which meant that governments could peg their national currencies, semi-peg them or allow them to free-float, as dictated by their individual national circumstances. In 1987 this system was officially recognised. Eventually this led to the establishment of the European Monetary System in 1978, but this too failed in 1993.
Today currencies are able to move independently and can be traded by anyone with access to a computer. This has led to an increase in fx speculation by financial institutions such as banks, brokers, hedge funds and the general public. Central banks will intervene, on occasion, but it is the process of supply and demand that ultimately drives today’s markets.