How Forex Evolved Beyond Banks

It may be a cliché, but it’s true. In order to understand the present, it helps to know the past. Forex currency trading has a history as old as money itself, and the best Forex brokers know that history.

The key to foreign exchange is the belief that various forms of money have value and can be traded for something else. This belief started with the stamped coin beginning around the seventh century B.C. in Asia Minor and continued to where the coins themselves were of value because they were made of precious and semi-precious metals such as silver and gold. During the Roman era, coins had a center-punch, so people could string them together for easier transport. Nice, but still cumbersome.

An even more convenient, and certainly lighter, mode of commerce became paper money. People deposited their coins into banks, and banks issued paper guaranteeing the paper could be exchanged for the coins. A much better system, but each bank had its own paper. The big banks became recognized all over, whereas the smaller banks’ paper could only be used locally. This was the first example of foreign exchange trading, but there were obvious kinks that needed to be worked out.

During the 19th century, England instituted the concept of gold-backed currencies, and up until the stock market crash of 1929, the world worked on the gold standard. Because of the crash, most countries established central banks to regulate the national currency. The United States dollar was the leading form of currency, and in 1944, the Bretton Woods Conference fixed national currencies around the world to the U.S. dollar against gold at $35 an ounce. This worked until 1971 when President Nixon dropped the gold standard, and in turn, the U.S. dollar was dropped as the reference point. Enter the world of Forex currency trading.

In the early 20th century, currency trading was confined to telephone, telegram and telex. Things have definitely changed. With technology moving at its rapid rate, we now experience 24-hour-a-day trading in “real time.” Software has created a tool called “robot trading.” The computer chip has become as important as the point and figure chart.

The dollar is still the major player in foreign exchange transactions, accounting for more than 70 percent of all foreign exchange transactions, but now it seems that China, India and Brazil are the ones to watch. The world of currency trading is no longer available only to the banks. As technology grows, so grows the market.