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Forex Origins

A long history of historical events worldwide have shaped the modern forex market. For that reason, a study of the history of foreign exchange can take a huge amount of time and effort to complete. Even though certain historical events like the Smithsonian Agreement and the Bretton Woods Accord can be studied for historical and cultural enlightenment, it is not of much use to a modern forex trader. Instead, it is more practical to focus on the logic behind FX as an efficient medium of exchange for goods and services.

Our ancestors used the "barter system" as a means of exchange. Because it took people a great amount of time negotiating before a deal was made, bartering was not an efficient mechanism for exchange. Furthermore, a lot of time and effort was needed to search for the "goods" required to complete the transaction. The public acceptance of standardized sizes and grades of precious metals like gold, silver and bronze for the exchange of merchandise eventually improved the barter system - since metal currency was durable and could be stored. A variety of IOU's started becoming popular as mediums of exchange during the middle ages.

As time went by, more and more people began to realize that it was a lot better to carry around paper than heavy bags of precious metals. As a result, paper currency backed by gold reserves were eventually adopted by the more stable governments - the beginning of the gold standard. On July of 1944, the Bretton Woods Accord pegged the U.S. Dollar to gold at a price of $35 per ounce and it also fixed other foreign currencies to the U.S. Dollar. This lasted until 1971, when president Nixon let the dollar "float" freely against other currencies and eliminated the conversion to gold.

Nowadays, the forex market has grown into the biggest financial market in the globe, with a daily trading volume of 1.5 trillion U.S. Dollars or more. The tremendous growth of the Internet has propelled forex trading among private individuals (retail market) tremendously, even though foreign exchange has traditionally been an institutional market.

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