03 History on the FOREX Market

The history on the Forex Market was not as it is today. There have been some major changes over the years!

Today it is very easy for anybody to speculate in the FX markets, but it was not always like this.

In the past, currency exchanges were for the most part fairly stable. While different currencies and the need to exchange them has been around since the Babylonians (who were credited with the first use of paper notes and receipts), exchange rates as a whole were relatively stable.

03 History on the FOREX Market

Speculation pretty much did not happen. And certainly the huge speculative activity in the market today would have been seriously frowned upon.

Most banking and government institutions, as well as the general public, regarded speculating in currencies as a negative thing and preferred the exchange rate stability.

Prior to around the 1970’s, currency trading was limited mostly to large companies who were conducting business in multiple countries.

Trading for investment and speculative purposes was generally not done at this time, well not by retail traders anyway. And for many reasons, lack of volatility and trading accessibility being two of the bigger ones.

Towards the end of World War II, many economies through Europe were in serious trouble. Whereas the U.S. being far away from the chaos and destruction was viewed as a strong economy with a large powerful military and also a large supply of the worlds gold!

Bretton Woods 1944

In July 1944 delegates from 44 countries met at the U.N. Monetary and Financial Conference in Bretton Woods (in the U.S.) to establish what was called the “Bretton Woods Agreement” for monetary and exchange rate management, to help these struggling economies recover and stabilize.

The Bretton Woods Agreement had various aspects to it, but it was the “pegging” of foreign currencies to the USD and then the US pegging their currency to Gold at $35 per ounce that had the greatest immediate impact on the global economies. At this time the US owned about 2 thirds of the worlds known gold supply.

GLS Equity USD Gold Pegging

The U.S government was obligated to maintain gold reserves equal to the amount of currency in circulation. In other words the USD was backed by a real asset, Gold and was declared the World Reserve Currency.

By pegging (or linking) these currencies directly to the USD, the value of the pegged currencies remained dependent on the value of the USD. This worked fine for many years, but eventually ran into a few major problems. The most obvious being that for many reasons (some good and some perhaps not) the US printed more and more USD’s.

So while the gold supply remained stagnant, the supply of USD was steadily increasing and as with most things when the supply increases the perceived value tends to goes down. At this time many other countries were becoming concerned and losing trust in the USD, because they knew the US could no longer back up their currency by gold, there was simply not enough gold compared with the USD’s being printed.

So these countries started exchanging their currency for USD and then exchanging their USD for gold. Because gold was still an asset with real intrinsic value with a finite supply.

The great global gold trade

When you think about this, it was a pretty good speculative trade, the USD was devaluing itself, but at the same time had promised it would allow foreign countries to exchange USD for gold at the rate of $35 per ounce.

Eventually this came to an end as the US gold reserves were getting seriously depleted. So in 1971 president Richard Nixon put an end to it and announced to the world that; The US would no longer exchange gold for the USD.

This meant the USD became once again a Fiat currency. Not backed by any real asset, just a promise from the government, like most other currencies today.

US President Nixon Ends Bretton Woods Agreement

This point effectively marked the end of the Bretton Woods Agreement. And most countries went back to the use of individual floating foreign exchange rates.

And because they were no longer tied to each other or to gold the volatility in exchange rates began to increase.

This effected many things, including making the FX markets more attractive for speculative traders. If there is no volatility (the market does not move) there is no potential for us traders to profit.

So where does that leave us today?

The USD is still today held as the worlds reserve currency. It is used for the majority of all international trade. This may change in time, but as for when I have no idea.

So the removal of the Bretton Woods Agreement started the growth of the FX market. Then followed by the rise of the machines and the exponential global trade expansion the internet has brought us, the FX markets have grown substantially year after year.

Today the FOREX market is by far the biggest global financial market in the world. Some of the biggest days topping a mind-blowingly massive 6 Trillion in volume – WOW!

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