History of the Forex Market

When it comes to the beginnings of foreign exchange dealings, some trace it all the way back to ancient times, possibly even beginning with the introduction of coinage by the Egyptians and the use of paper notes by the Babylonians. Without question, by Biblical times the Middle East saw a rudimentary international monetary system when the Roman gold coin aureus gained worldwide acceptance. This was a common stock among money changers from that time period.

By the time the Middle Ages came about, foreign exchange was a function of international banking with the growth in the use of bills of exchange by the merchant princes and international debt papers by the European powers. This was in a time of underwriting the period’s wars that went on. Foreign exchange became a huge part of the economy and governmental powers.

The Gold Standard

The gold standard was a fixed commodity standard taking place from around 1816 to 1933. The countries that participated in this fixed a physical weight of gold for the currency in circulation, allowing it to be redeemable in the form of the metal. For example, in 1816, the pound sterling was defined as 123.27 grains of gold, which was on its way to becoming the foremost reserve currency. This market led to the expression “as good as gold.”

The U.S. dollar adopted the gold standard late in 1879 and became the official bearer, replacing the British pound when Britain and other European countries came off the system with the outbreak of World War I in 1914. As the market though continued to worsen, it eventually led even the dollar to come off the gold standard by 1933, ending this foreign exchange era. This set off the period of collapse in international trade.

The Fed

The Fed, or the Federal Reserve System, was created by the U.S. Congress in 1913 as an independent entity, but subject to oversight from Congress. The Fed is headed by a government agency in Washington known as the Board of Governors, which consists of seven people appointed by the President.

The Federal Reserve System consists of 12 regional Federal Reserve Banks located in different major cities around the country. These banks operate under the overseeing of the Board of Governors. The banks generate their own income from four main sources including:

  • Services provided to banks
  • Interest earned on government securities
  • Income from foreign currency held
  • Interest on loans to depository institutions.

The main responsibilities of the Fed are to “promote sustainable growth, high levels of employment, stability of prices to help preserve the purchasing of the dollar and moderate long-term interest rates.” What this actually means is they encourage a sound banking system and a healthy economy. In order to do this they serve as the banker’s bank, the government’s bank, the regulator of financial institutions and the nation’s money manager. As well as all of that, they also issue all coin and paper currency.

Bretton Woods System

After World War II, Bretton Woods came about in July of 1944 when 45 countries attended a conference to formulate a new international financial framework. The main features of this system were:

  • Fixed but adjustable exchange rates
  • The World Bank
  • The International Monetary Fund

It was designed to ensure prosperity in the postwar period and prevent the recurrence of the 1930s global depression. The name came from a resort hotel in New Hampshire and it formalized the role of the U.S. dollar as the new global reserve currency.

Where Are We Now?

In 1972 the International Monetary Market was incorporated as a division of the Chicago Mercantile Exchange that specialized in currency futures. Then in 2002, the Euro became the official currency of 12 European nations that agreed to remove their previous currencies from circulation.

This completely changed the entire Forex market, as the Euro was immediately considered a success. Already, it is the second most frequently traded currency in the FOREX market today. Since its introduction, the Euro has been adopted by 10 more countries as well.

Today, the U.S. dollar and the Euro are by far the two most frequently traded currencies in the market and for some people they are the only two that they ever trade. The Forex market continues to grow rapidly and from the looks of it has no plans of slowing down. As said before, with over a $3 trillion daily turnover, the Forex market continues to be the world’s largest financial market.