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A Brief History of Foreign Currency Exchange Trading

Money, in one form or another, has been around since the beginning of time.

The industry of trading foreign currency for monetary gain is commonly referred to as forex trading or FX trading. Forex trading hasn’t always been around, and understanding how it came into being can help you succeed in trading this market.

To that end, we offer you a brief history of FX trading:

Inflation, Hitler, and the Bretton Woods Agreements

The trading of foreign currency for the purposes of speculation and profit only started to blossom in the early 1970s, with the collapse of the Bretton Woods Agreements.

The Bretton Woods Agreements were established in Bretton Woods, New Hampshire, between the Allied nations at the end of World War II. The goal was to foster peace around the globe by limiting the fluctuation of currencies.

The extreme monetary inflation that occurred in Weimar Republic Germany, after all, had helped create an environment where Hitler’s evil arguments could be convincing to a desperate populace. The Bretton Woods Agreements sought to provide currency stability, and therefore remove a possible cause of future wars between nations.

To achieve that stability, these agreements required that the nations involved fix the exchange rate of their currencies in relation to the U.S. Dollar, which would itself be fixed to gold at a rate of USD $35.00 per ounce of gold.

Under this framework, the static, non-fluctuating nature of currency values made foreign exchange trading impossible.

Of course this is exactly what the nations involved with the Bretton Woods Agreement wanted: to avoid conflict by maintaining monetary. In that context, discouraging currency speculation was a completely rational and justifiable thing to do.

The Agreements Succumb to Supply and Demand

By 1971, the Bretton Woods Agreements were facing stiff opposition from the law of supply and demand. Global trade was emerging, and the demand for certain currencies was much more than the demand for other currencies.

In 1971, the U.S. under Richard Nixon suspended the convertibility of the dollar into gold. This paved the way for a massive increase in the supply of U.S. dollars that could be printed and made available to a hungry world and a growing United States.

By 1973, Bretton Woods had completely collapsed, as had several other similar agreements around the globe that were intended to help maintain global monetary stability.

Supply and demand won the battle over stability.

The Internet Changed Everything

At first, the foreign exchange markets were made up of very few banks that traded currencies between themselves. Today, three trillion dollars changes hands every day in the forex markets. Banks, institutions, and private investors all participate.

What happened between then and now? In a word, the Internet.

By 1996, computers were commonplace in homes around the world and the Internet was introduced on a global scale. Stock trading went online and it only made sense that currency trading would too.  It was easy, it was accessible, it was practical, and it was in demand. You could do it in your underwear, as the classic Internet cliché has it.

Once the exclusive province of banks and institutions, now, thanks to the Internet, trading currencies was as easy as clicking your mouse.

The Rest Is History, and If You’re a Forex Trader, You’re Living It

The foreign currency exchange markets are by far and away the largest, most liquid, most globally important financial markets in the world.

As a forex trader, you are participating in a financial market that has a unique and powerful history, one that is connected to the human condition as no other financial market is or can be.

The value of currencies impacts the elderly widow who has her savings socked away in a bank, the youth who is working to move up the employment ladder, the world leader who’s concerned about keeping jobs in his or her country—

Everyone, literally everyone, is impacted by the value of money. As a forex trader, you are making an impact on people’s money on a daily basis. Millions of other forex traders are doing the same. Together, that’s a lot of impact, and it’s ongoing, happening every day, all around the clock, with no sign of stopping or even slowing down anytime soon.

In short, the forex markets are history in the making—and you’re making it. When you think of it in those terms, FX trading can be a humbling experience.

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Forex trading hasn't always been around; understanding how it came into being can help you succeed in trading this market. Read about the history of foreign exchange trading.  arrow