The history of the forex market

The currency market, as we know it nowadays, of course has not always been like this. As from 1972 currency trading is based on supply and demand and we know private forex traders only since 1997. In this article the history of forex trading will be clarified, so that you’ll get a better view on the development of forex trading and an answer to the question why the American dollar is still playing an important role inside the currency market.

The Gold Standard in 1816

Two centuries ago the so-called Gold Standard was used to trade currencies. The Gold Standard supported each currency by means of gold reserves and this way it was prevented that countries randomly forged money and caused inflation. Although the Gold Standard brought a lot of stability, it also involved a big disadvantage. During unfavorable economic times a country wasn’t able to pump more money into the economy because it didn’t have the amount of gold to fulfill this objective. This problem consequently occurred when the first world war broke out. The western countries were forced to renounce the Gold Standard and even the US abolished this Standard due to the enormous economic depression in 1933.

The Bretton Woods Agreement in 1944

Nevertheless some kind of adjustment had to be realized to provide stability on the international markets. For that reason the Bretton Woods agreement was concluded in 1944. This agreement involved among other things, that the American dollar was linked to a fixed gold price amounting to $35 per ounce and that the other currencies would again be linked to the US dollar. This way the American dollar became the world’s reserve currency.

As the American dollar was the only currency directly linked to a gold reserve, other currencies, as well as oil, gold, silver etc. were all expressed in American dollars. Nevertheless even the US eventually had to take leave of the Bretton Woods agreement due to the steady rising costs of the Vietnam war.

Free market in 1971

In 1971 it was decided to allow the various currencies to be the subject of free trade and consequently the price of a currency would be determined based on supply and demand. Nevertheless the American dollar kept being the world’s reserve currency, as without a sound dollar international monetary stability would not be possible, because raw materials and precious metals were still expressed in dollars.

Although it was a matter of a market which was based on supply and demand, nevertheless efforts were made to keep the price of a currency more or less stable. Yet eventually this didn’t have a favorable result, because a value of a currency was not adjusted to for instance altered market circumstances.

As from 1997 the currency market is accessible to private currency traders

Since the internet had not yet been introduced, only the large banks and other financial institutes were able to trade currencies. Thanks among other things to the internet, since 1997 the currency trade became more and more accessible to the private currency trader. In addition to this also the minimal deposit was becoming an important issue. Since a substantial minimal deposit was always required in the earlier days, the currency market wasn’t at that time accessible to the currency trader. Nowadays banks are allowed to split up their orders, so that even minor currency traders are allowed to participate in the forex market.

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