The History of Forex Trade
Exchanges have always been present in civilised societies. The need of acquiring new goods pushed people to exchange in order to get what they were lacking. At first, trade was very simple: it involved the exchange of one good for another. Bartering was not a very convenient solution as it takes time to find someone who wants to trade what you are looking for and who is also interested in what you are offering. As people became more civilised and sedentary, exchanges between towns increased and a better trading system had to be found.
At that time, some objects – such as shells, cowry shells and basically any good-looking and rare objects – were used to trade goods but they cannot be really considered as money. The main problem was that using that types of objects were not convenient at all for certain transactions – such as large ones. Their use was therefore too limited to be considered as currency and pushed civilisations to find something else.
THE FIRST CURRENCY
At around 600BC, the first “official” currency ever appeared in the ancient Kingdom of Lydia – situated where modern turkey is today. This currency took the form of a minted coin made of electrum, a natural mixture between gold and silver. The first pure gold coin was introduced later by King Croesus, the last King of Lydia. You can learn more about King Croesus and others in this interactive infographic about the History of Forex: hantecfx.com/fx-trading-history.
From then on, many different civilisations started to use coins on a daily basis for everyday purchases or sales.
In China, under the Tang Dynasty (618AD – 907AD), the paper note was introduced and lead to the concept of credit. At first, this system was mainly used by merchants to avoid carrying large amounts of coins for transactions of considerable size. Paper notes only started to be commonly used in China from the 11th century though. When Marco Polo went to China, he discovered this payment system and introduced it in Europe when he came back. However, the first bank note ever printed in Europe came out in 1661AD, in Sweden. Starting from this date, paper notes started to be more and more used because they were easy to produce and did not rely on raw materials.
THE FIRST FOREX MARKET
During the 17th century, European countries were subject to a consequent growth in their economy which lead to the creation of the first Forex market (in the current sense) in Amsterdam. Basically, exchange rate depended on the importations and exportations of foreign currencies to and from the Netherlands.
THE GOLD STANDARD MONETARY SYSTEM
1875 is an important year in Forex exchange as the gold standard monetary system was introduced for the first time. The gold standard system was created to replace the former system which used gold and silver as currency for international payments. The problem was that gold and silver rates would change depending on supply and demand and external factors such as the discovery of a new mine. With the gold standard system, currencies were insured by a specific amount of gold and vice versa. The problem was that countries needed important gold reserves. This system showed its limits during the First World War as countries started to produce more money than they actually had gold.
THE BRETTON WOODS SYSTEM
In 1946, a new system had to be found to replace the gold standard system. Allies came out with a solution: the Bretton Woods system. From now on, currency could be exchanged in either gold or US dollar. Moreover, a method of fixed exchange rate was developed. At the same time, three institutions which had the role of oversee monetary exchanges were created:
- The International Monetary Fund (IMF)
- The International Bank for Reconstruction and Development
- The General Agreement on Tariff and Trade (GATT)
However, the main issue was that countries preferred to exchange currency in US dollar instead of gold as it was more convenient for them. Because of the increasing demand for US dollar, it became too strong which made potential investors look for other countries to invest in. US dollar rate variations were instable which had an impact on the currency of other countries. These issues lead, in 1973, to the fall of the Bretton Wood system.
Because European countries were subject to strong money variations, they came up with the European Monetary System (EMS) in order to regulate monetary fluctuations. However, it did not work very well but one thing came out of it: the euro.
Even if Forex Markets are common since the beginning of the 20th century, the failures of governments in regulating currency variations pushed more and more people into Forex exchange and put the lights on the free-market.
One example which perfectly illustrates this is the creation of the BitCoin currency in 2009 which lead afterward to many different cryptocurrencies creations. Even if economists are still arguing about calling BitCoin a currency, it is definitely an alternative option to traditional currencies and it is free from government regulations. However, one should always be careful when using cryptocurrencies as there is no guaranty in case of an online fraud for instance.
One thing is sure though: with the constant improvements and releases of new electronic devices, the way we use money has changed a lot – internet payments, contactless payment, payments with a smartphone – and will definitely change again in the next decade.
This was brought to you by Hantec Markets.