The most archaic roots of forex trading as a system lie in the ancient civilizations. Records have shown that ancient Egyptians and Greeks traded currency as a commodity.
The recent history of this trade, however, lies in the medieval and early modern eras. During this time, formalized institutions like banks facilitated commodity exchange. The current setup of forex, therefore, has its roots in the basic methods of exchange established in the early modern era. In order to fully understand forex, it is important to analyze the history of the trade and what has shaped it over the years. In a forex trading world dominated by popular platforms like Metatrader 4 (also known as “MetaTrader 4 platforma” in Croatia), it is definitely interesting to find out the roots of forex. Here is a quick account of forex trading that analyzes the most significant events in the trade.
The Gold Standard of 1875
If there is a single significant event that laid the foundations of the forex trade, then it is the establishment of the gold standard system in 1875. This event marked the formalization of international trade. Before the event, international trade was not regulated and exchange of currency could happen either through silver or gold. Currency itself was not exchanged in its fiat form but rather in a unit of gold or silver. The standardization of gold led to a stabilized forex market and most countries soon had a standard exchange rate for an ounce of gold. The local prices of gold within the specific countries nevertheless changed over time. This, in turn, affected the value of their currency in the exchange market. The forex trade would thus become much more sensible because of the dynamics. This system would persist well into the 20th century until the first world war. The effects of war in Europe put a lot of pressure on gold to the extent where it was no longer tenable.
The Bretton Woods System
In 1944, a new global standard for forex would arise in Bretton Woods, United States. This standard was the United States Dollar. Its establishment was marked by three key significant events. First, the fixed unit of international exchange rates was established. Secondly, the gold paved the way for the dollar to be the primary reserve currency. Third, the establishment of three key institutions meant that international trade would be much more effectively monitored. These institutions were the IMF, the GATT and the International Bank for Reconstruction and Development. The Bretton Woods System came under great pressure in the 1970’s and eventually collapsed. The system is however still in largely in place through the three institutions it established in 1944.
Forex Trading in A Global Market Economy
Today, international forex trading is largely led by market forces even though some commodities tend to affect the trade. Commodities like oil are some of those that have affected the forex market in recent times. Debt crises in economies around the world also tend to influence the forex market. In general, the demand for any particular currency is based on economic factors like production. The dollar is still widely accepted as the international standard of exchange albeit in a de facto recognition that is tied to the market forces.