/ History of the Forex Market: Origins and Evolution Around the World

The Forex market brings together tens of thousands of participants around the world every day. From large financial institutions to small traders trading from their living room at home. This financial market phenomenon characterised by currency exchange has evolved over the years. There are many factors that have contributed to the proliferation of foreign exchange trading. But if there is one thing that is fascinating, it is the history of the Forex market, its origins and how it has evolved as the world has changed. Although historians try to attribute the Forex market to modern times, it actually originated much earlier. Ancient peoples turned currency exchange into a common commercial activity. As trade in various commodities spread across the Mediterranean Sea, the need for common elements of valuation in exchange became the germ of the Forex market.

Currency market in antiquity and the Middle Ages

Currency exchange is a human activity that originated thousands of years before the Christian era. In ancient Asian Mesopotamia, people exchanged clay tokens denoting goods. This made it easier for traders in the region. The future of the Forex market was already written on these clay tokens. As navigation became more advanced, trade in goods, stones and precious metals spread to all shores of the Mediterranean. Coins became the most important instrument of exchange. After the collapse of the Roman Empire in the West, around the 6th century AD, cities began to develop into small independent kingdoms. Thus was born the feudal world. Each of these kingdoms began to mint its own coins. The currency market began to expand.

The gold standard during the birth of the Forex market

The consolidation of the mercantilist system in the Middle Ages was a long process. Different kingdoms began to mint their own coins of silver and gold. In this way, they reflected the value of themselves. Coins were hoarded, gold was hoarded. That was the simplest conclusion. Large transactions, in a time when coins were transported in carts, posed a serious problem. So in the late seventeenth and early seventeenth centuries, banks in England and Switzerland began issuing banknotes backed by gold, which were kept in their vaults. In 1821, the Bank of England officially adopted a measure of convertibility, according to which money (coins and banknotes) was secured by gold in the vaults. Thus the gold standard was born. The 19th century was a period of consolidation. The adoption of the gold standard made it possible to establish a fixed exchange rate between different currencies. The Forex market was born. The value of each country's currency was determined by the amount of gold with which each currency was backed.

Two wars that would change the world

In 1900, at the turn of the century, the United States passed the Gold Coinage Act. This law established that the U.S. dollar became the world's reserve currency backed by gold. What did this mean? It meant that individual countries could create dollar reserves, which they could then exchange for gold at the US Treasury. By the late 1920s, World War I had shattered the foundations of Old Europe. The United States, through its industrial and financial growth, was consolidating its role in the world. The dollar became the strongest currency on the planet. The foreign exchange market was already functioning in much the same way as it does today. While the countries of Europe were in the process of recovery, the United States saw its power shaken by the stock market crash of 1929. The leader of the new capitalist world fell into a deep recession for nearly 10 years. All this financial and economic turmoil became the breeding ground for a new global conflict. In 1939, World War II broke out, and this time the United States became the direct protagonist.

The Bretton Woods agreements were concluded, the dollar was strengthened, and the Forex market became important. The end of the Second World War left a heavy material, economic and financial impact in Europe. The United States solidified its role as the most powerful country in the world, which included its currency. In 1944, as the war was coming to an end, the Allied nations met in New Hampshire. The goal was to lay the groundwork for rebuilding war-torn countries and to create a system of monetary stability. Thus were born the agreements that came to be known as the Bretton Woods system.

The main provisions of the Bretton Woods system

• Currency stability: a system of fixed exchange rates was established. However, to avoid competitive devaluations and sharp fluctuations, an adjustment formula was included; 
• Promotion of international trade: facilitating international trade by establishing a system of stable and predictable exchange rates;
• Economic Recovery: to help rebuild war-torn economies and revitalise the world economy.

In 1971, an event occurred that was to finally shape the Forex market as we know it today. US President Richard Nixon ordered the abandonment of the gold standard and fixed exchange rates. The dollar and all other currencies became floating. These measures allowed the US to issue currency without the necessary gold backing. Inflation skyrocketed and the world's currencies became subject to supply and demand. For the first time, currencies were no longer constrained by restrictions and regulations, which led to a significant increase in volatility and trading volume in the Forex market. Investors were able to capitalise on currency fluctuations and seek profit opportunities in a more dynamic and competitive environment.

The role of supply and demand in Forex trading

With the liberalisation of the market, supply and demand have become the main drivers of Forex currency trading. The supply and demand for different currencies determine the relative value of each currency and hence the exchange rates. Investors, both institutional and retail, take advantage of these fluctuations and use various strategies to make profits. The supply and demand dynamics of currencies can be influenced by a wide range of factors such as economic indicators, political events, changes in monetary policy and other international developments. It is important to note that supply and demand is not only determined by economic and political factors, but also by investor perceptions and expectations. Market psychology plays a crucial role in currency price fluctuations and in the buying and selling decisions of market participants.

Expansion of the Forex market

The measures taken by Nixon, in addition to political consolidation, opened up the Forex market to begin a rapid expansion. Investors and speculators could enter the Forex market and trade freely. This allowed the process of supply and demand to set the prices of the world's currencies. However, changes were coming that were going to revolutionise the Forex market. The advent of the internet and new technology opened the doors to new participants. The Forex market was no longer a place reserved only for large traders. Individual investors and traders began to trade with the only restriction being the availability of the necessary capital.

Impact of liberalisation and deregulation on market growth

Another key factor in the history of the Forex market was the liberalisation and deregulation of foreign exchange trading. The removal of restrictions and barriers facilitated the participation of a wider range of players including financial institutions, companies and individuals. The relaxation of regulation has allowed investors to access a wide range of financial instruments, such as CFDs, and use leverage to maximise profits. This has contributed to a significant increase in daily trading volume in the Forex market, cementing its status as the most liquid financial market in the world.

Forex history is on your side

It is clear that the Forex market as we know it today has nothing to do with the birth of foreign exchange. However, it was those first clay chips that paved the way for you to become a Forex trader today. Now that you know the history, you can use today's market features to build your future. The first big step to becoming a successful trader is to have a solid background in trading, familiarise yourself with all the theory and be able to balance being bold and accurate, you also need to believe in yourself.