You may know the foreign exchange market as one of the largest and most profitable markets today, but did you know that people have been trading currencies since ancient times? In fact, the forex market that we know today was shaped by several global events starting from the Babylonian period.
The Gold Standard
Before paper money, people exchanged goods and services through the barter system. The system then evolved in the 6th century BC when the first gold coins were produced. Because of its durability and limited supply, it didn’t take long for gold to become widely accepted as a medium of exchange.
However, carrying gold became impractical because of their weight. In the 1800s, countries began adopting the gold standard, in which governments agreed to freely convert paper money into fixed amounts of gold.
The gold standard proved to be an effective system of exchange until the world wars, which forced European nations to print more money to pay for war damages.
The Bretton Woods System
The transition of the global monetary system from the gold standard to the modern forex market started with the Bretton Woods System introduced at the end of World War II.
The famous Bretton Woods Agreement was signed in 1944. Under the new agreement, the dollar replaced gold as the standard for international transactions. At the time, the dollar was worth $35 or 1/35th of an ounce of gold.
Participating countries decided to go with a fixed peg against the U.S. dollar and the only diversions permitted were 1%.
Countries were also required to constantly oversee and preserve their currency pegs, which they did by using their currency to purchase or sell U.S. dollars.
Over time, the Bretton Woods Agreement failed to peg gold to the dollar simply because there was not enough gold. In 1971, President Richard M. Nixon scrapped the Bretton Woods System and it was eventually replaced by the free-floating currency system.
The Free-Floating System
The collapse of the Bretton Woods System forced the forex markets to close from 1972 to March 1973.
In an effort to reduce its dependency on the US Dollar, European countries introduced the European Joint Float. Unfortunately, the system also collapsed in 1973.
As a result, the world started to transition to a free-floating system. Under this system, participating currencies had floating exchange rates that varied from day to day. The system put an end to state control of foreign exchange and paved the way for relatively free market conditions.
The Modern Forex Market
Today’s forex market is open 24 hours, 5.5 days a week, with an average daily trading volume of $5 trillion. Thanks to the internet, people can quickly trade currencies from any location and at any time of the day. Forex traders also have access to valuable economic data and price warnings.
For traders in an evolving forex market, they need to stay ahead of the curve. Fair Forex can help you make smart trading decisions and maximize profits.
Contact us at 1-844-600-FAIR to book a consultation.