The origin of forex trading when tracing its history goes back centuries. Different currencies and the need to exchange them existed since the days of the Babylonians. They are credited with being the first to use paper books and receipts. Speculation hardly happened, and for sure, this horrific amount of speculative activity in today's markets would have certainly aroused their resentment.
These days, the value of goods was expressed in the form of other goods (also
called the barter system). The obvious limitations of this system encouraged
more acceptable means of exchange. It was necessary to establish a common base
for calculating the value. In some economies, some things such as teeth,
feathers, and even stones were used for this purpose, but later on, the use of
metals, especially gold and silver, spread to a prominent place as an
acceptable means of payment and also as a reliable store of value. Trade
between the peoples of Africa, Asia and others was carried out through this
system.
Money was initially minted from the metal preferred in stable political systems, and the introduction of the paper form of government bonds also gained acceptance in the Middle Ages. This type of bond or paper currency has succeeded more by imposing it through force more than persuasion until it has become the basis of the modern currency system in today's world.
Before World War I, most c
entral banks backed their currencies by making
them convertible into gold. Nevertheless, the standard gold-exchange system
had weaknesses during boom-bust cycles. When an economy recovers, it begins to
increase the pace of its import from abroad until its reserves of gold, which
are required to support its currency, decline; As a result, the money supply
diminishes, interest rates rise, and economic activity begins to slow down to
a recession. In the end, the prices of commodities reach price bottoms when
they decline significantly and then they seem more attractive to nations and
other peoples, who begin to buy a lot of them in order to pump them into the
arteries of the economy, which leads to an increase in the money supply, a
decline in interest rates and ultimately the restoration of wealth in this
economy. With this type of gold exchanges, there was no need for the presence
of central banks in order to achieve full coverage of the government's
currency reserves. Perhaps not often, big problems occurred, but in times when
the mindset of one group spreads this disastrous idea of converting
banknotes into gold in large quantities among the public, panic results in the
so-called "scramble for banks". The combination of an oversupply of paper
money without enough gold to cover it led to devastating inflation and
political instability. The Great Depression and the abolition of the gold
standard system in 1931 created a period of lull in forex market activity.
From 1931 to 1973, the forex market underwent a large number of changes. These
changes greatly affected the global economies until the present time and
speculation in the currency markets during that period was very limited.
In order to protect domestic national interests, more controls were introduced with the aim of controlling foreign exchange markets in order to prevent market forces from punishing irresponsible monetary policies.
Near the end of World War II, the Bretton Woods Agreement was reached on the initiative of the United States in July 1944. The conference in Bretton Woods, New Hampshire, rejected John Maynard Keynes' proposal to establish a new global reserve currency through a system based on the US dollar. International institutions such as the International Monetary Fund, the World Bank and the Free Trade Agreement were established in the same period as the victorious countries in World War II searched for a way to avoid monetary crises that led to instability and wars in the past period. The Bretton Woods Agreement of Fixed Exchange Rates System partially restored the gold standard system, as it set the price of an ounce at $35, while setting fixed exchange rates for other major currencies against the US dollar, and this system was supposed to be permanent.
The Bretton Woods system came under increasing pressure as national economies moved in different directions during the 1960's. A number of attempts at re-planning contributed to keeping this system alive for a long period of time, but Bretton Woods eventually collapsed by 1970 after President Nixon's decision to discontinue the dollar-to-gold system in August 1971. The dollar is no longer suitable as a single international currency at a time when the United States was under severe pressure due to the increasing budget and trade deficits.
The past few decades witnessed a great development in the currency exchange markets in parallel with the development in other global financial markets. Restrictions on capital flows have been removed in most countries and left to free market forces to adjust currency exchange rates according to their perceived values.
The European Economic Community introduced a new system of fixed exchange rates in 1979 known as the European Monetary System. Europe's pursuit of currency stability continued with the signing of the Maastricht Agreement in 1991, which aimed not only at stabilizing exchange rates, but also replacing many of them with the euro in 2002. London was and still is the main center of the offshore market. In 1980, it became the main center of the Eurodollar market when British banks began lending in US dollars instead of the pound in order to maintain their leadership position among the world's financial centers. At the end of 1997, some currencies were devalued against the US dollar, while others were left fixed, especially in South America, which was also suffering from miserable conditions at that time. While trading companies have had to face a more volatile currency level or environment during these years, investors and financial institutions have discovered new ground to work on. The forex market initially worked under the supervision of central banks and government institutions, but later it absorbed various other financial institutions. At the present time, it also includes dot-com companies as well as those that work on the Internet. The size of the forex market is currently dwarfing any other investment market. The foreign exchange market is the largest financial market in the world, where nearly 1.9 trillion dollars are traded daily. It is estimated that more than 1200 billion dollars are traded daily and thus it can be said with ease that the forex market is a very lucrative opportunity for discerning investors.