What is forex market by Encore Capitals

How did the Forex market begin? The foreign exchange market’s historical background

Foreign exchange is a legitimate global business of exchanging different world currencies and other financial tools that ought to be centuries old. Its earliest beginning dates back to the Babylonian period when trading through the barter system was practiced as a means of Exchange.

The common conception is that Forex trading begin in Amsterdam roughly 500 years ago. Started in Amsterdam, Forex trading then Expand further throughout the whole world. Now, the forex market is one of the largest, most liquidated and accessible trading markets worldwide. Forex industry had experience several major shifts in the past, gaining shape through critical global events like the barter system, gold coin standard, Bretton Woods Monetary Conference, and the floating method.

Forex history

History of Currency Trading & Foreign exchange Market

When did Forex start?

Barter System
The trade by barter system is one of the oldest method of exchange, dating back to 6000 BC and is commonly seen as the building block behind the formation of forex trading in the later years. Under the barter system, goods were exchange for other goods. The plan later develop, and goods like animal hides and skin, salt and food spices which were of high demand, became popular mediums of exchange. Although, the 6th century BC notice the production of gold coins. Thus, gold coins adopted the role of currency for its portability, divisibility, uniformity, limit of supply, namely significant characteristics of money today. In fact , the concept went on to displace  the barter system.

Gold Coins Standard

Most countries adopted the gold standard at the tail end of the 18th century. The gold standard guaranteed that the government would pay any amount of paper money for the equal price of gold, which run smoothly until the first World War hit. European countries were forced to suspend the gold standard to fund the war by increase printing paper money. Hence the need for each country to develop their fiat currencies arose at this point. As a result, paper money was bound to be printed by each country as their means of exchange.

Bretton Woods Monetary Conference (1944 – 1971)

The Bretton Woods Monetary Conference, held in Bretton, was one of the most significant events in history that helped to standardize the Forex Market as we have today.

After World War II, the G3 comprising the USA, Great Britain, and France met at the United Nations Monetary and Financial Conference in Bretton Woods to fashion a new global economic order. The location is choosen at the time was simply because the US being the only country not heavily affected by the war. Almost all major European countries were in mess during this period. WWI change the US dollar from a failing currency after the stock market crash of 1929 to a yardstick currency by which other international currencies would Later be compared against.

eventually, other countries were required to initiate an exchange rate based on the relative exchange rate of the US Dollar to the home currency. However, the US dollar could not overpower gold as it held the highest amount of substantial reserves globally. To this end, they rather attached a higher importance to gold against the dollar exchange rate. The dollar as the standard unit of exchange would lead to the formation of a free-floating system.

Creation of Free-Floating System

Oppositions to the dollar dominance brought about by the Bretton Woods Accord led to the Smithsonian Agreement in December of 1971. This session Permit for a greater fluctuation band for the currencies. The United States Present the dollar to gold at the exchange rate of $38/ounce, thereby decline the price of dollar. Under the Smithsonian Deal, other major currencies could fluctuate by 2.25% against the USD. The USD has a pair of gold.

The Plaza Accord

At the end of early 1980s, the weight of the US dollar was collapse the economies of the third-world nations under debt and closing most European factories because they are not in the situation to compete with other foreign competitors.

As a result, in 1985 the G-5, the most powerful economies in the world comprising the USA, Great Britain, France, West Germany, and Japan, came together and sent spokeperson to what was known as a A Secret private meeting at the Plaza Hotel in New York City. News of the meeting publish, forcing the G-5 to make a declaration encouraging the appreciation of non-dollar currencies, together with the Euro, yen and pounds. This was as a consequence known as the ‘Plaza Accord’.

Who controls the Forex market?

Forex Trading Today

With the arrival of the internet, forex trading would instantly spread like wildfire across various countries. The banks played important roles in standardising today’s forex market by providing needed liquidity to exchange and trade many currencies.

Next, to allowed the individual to trade in the forex market without going to the bank to place their orders, the need for digital financial intermediaries linking the individuals to the Forex market appear. This gap is today filled by brokers. Today an individual can use the smartphone to signup a trading account with any given broker and freely take part in the global foreign exchange market.

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