Have you ever wondered how the Forex market is born?
What were the historical events through which today we can freely buy and sell currencies around the world?
It might seem obvious, but in reality the history of Forex is much more exciting than you might imagine.
In this post we will summarize in style all the events that led to the birth of the Forex market as we know it today (click the link to find out how it works), and the birth of forex trading.
Forex history: the birth of the most important asset of all time
In order to tell the history of Forex, I see no better way to start telling the history of the protagonist of this market: money.
Some say China, others Egypt of the Pharaohs, the appearance of money is dated at least 3000 years before Christ. The first tangible form of money were coins, which from 1530 BC were provided with a distinctive mark to authenticate them. From 650 BC money took its current shape, and with the development of metallurgy, the usage increased more and more.
From the V century AD to the X, coins were predominantly used within their original kingdom. The expansion of commercial activity led exchanges to pass from national to international, and there was therefore the need to facilitate payments and transactions.
In 1291 AD the first letters of exchange were created in Florence, thus giving birth to exchange rates and interest rates, and greatly facilitating the business. Needless to say how this innovation led to the huge fortunes of banker families, one of which was the famous Florentine family of Medici.
Forex History: the emergence of financial markets
The real financial markets made their first appearance in the sixteenth century.
They were simple markets, based on the trade balances of countries, and within these markets, some traders began to gain profit from the difference between exchange rates.
The use of money in the coming centuries intensified and expanded, but without having a real dominant currency, in relation to the others. One fact, however, set the stage for future change.
In 1866 it was completed the first transatlantic cable, that linked Europe and the US. It was an event of fundamental importance in the history of trading, and it led many European banks to settle in London, crowing the “City” the first financial center in the world.
The pound became strong among world currencies, but there was always a good that was still recognized as the most reliable: gold.
The Gold Standard was a fully convertible gold to currency system. Each currency was convertible into gold, and central banks acted as guarantors of this convertibility by owning gold reserves. This system allowed the exchange rate to remain fairly stable over the decades.
Forex History: The End of the Gold Standard
It was the First World War in 1914 to put an end to the gold standard, since countries, in order to meet the huge expenses, had to print money in large amounts, creating high inflation and making it impossible to guarantee convertibility.
After the First World War, a second attempt was made to return to the gold standard, albeit with some modifications, but the 1929 crisis put a definitive end to the attempts of monetary stability.
The supremacy of the dollar in the global financial landscape was enshrined in the Second World War, in 1944, with the Bretton Woods agreement, where was also created the International Monetary System (IMS), a control of currency fluctuations and economic stability organ. It was also determined that only the dollar could be converted into gold at a fixed rate of $ 35 an ounce, setting de facto dollar as the global currency basis.
Very important has been also the creation of the International Monetary Fund (IMF), which mission was to foster and support the weaker and developing economies, supporting and controlling the trade balances and global economic growth within a financial and currency system that was becoming every year more and more complex.
It was indeed this complexity, along with the need to find a new, more flexible currency system and the need to devalue the dollar, to ensure that in 1971 the US President Nixon, together with the IMF and the representatives of the 10 major states, decided to abandon the convertibility of currencies to dollar, and of the latter to gold, opening the doors to the world of free floating rates.
It was called Smithsonian Agreement,and was perhaps the most important element in the forthcoming developing of Forex as we know today.
The end of the Bretton Woods agreements gave free rein to the creation of money and the raising of capitals in the financial markets. In 1976 the agreements in Jamaica finally made official the beginning of a new era for the trading of currency, which were almost completely liberalized. Gold was no longer a reserve requirements and the banks had to just try to keep the exchange rate within a margin of +/- 2.5% from the central parity.
In 1978 EMS was born, i.e. the European Monetary System, along with the stabilization of the currency mechanism (ERM) against the ECU, the Euro ancestor.
Over the years, the advent of new technologies created the perfect landscape, and in the 90s the flows of capitals increased exponentially, finally breaking the wall that only allowed access to the Forex market to large financial institutions, primarily banks.
New investors and big traders could enter with their capital and expand the number of players.
The final act and the birth of the modern Forex market
Finally, hedge funds had the merit of giving the last push to the evolution of the Forex market as we know it today.
In 1992, the hedge fund of George Soros “attacked” the pound and the lira, causing a strong devaluation and forcing Italy and England to step out of EMS. This attack indeed made the containment of exchange rate policy fail.
This eventually create the awareness and acceptance of leaving exchange rates fluctuating without any restrictions.
That was the last piece.
Forex market was in fact liberalized. In the beginning large sums of money were needed in order to operate in it, but thanks to the expansion and evolution of the Internet and computers, Forex quickly opened its doors to all.
The brokerage companies flooded the market with their platforms and increasingly lowered (and still do) the minimum margin to operate, so much that today, every person with a PC, an internet connection and a few hundred dollars (even less ), can invest in this huge market.
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