How did Forex trading come about?

currency trading

How did Forex trading come about? There must be hundreds of thousands, if not millions of professional and home based Forex traders around the globe these days. But, how did forex trading come about? Who started it, where and when did it start? Thinking about it, it is quite remarkable that a mechanism has been established that allows anyone with an Internet connection to trade at a global level. I decided to investigate where and how it all started.

Ancient History

Forex trades first occurred in ancient times. Money-changers, people helping others to change money and also taking a commission or charging a fee were living in Biblical times. These money-changers used market style stalls, at feast times they used the temples instead. One of their functions was to exchange “special” temple coins for ordinary coins. Ordinary coins were considered “dirty” and unsuitable for donating to the temple!

Medieval and Later History

During the fifteenth century, the Medici family were required to open banks at foreign locations to exchange currencies and to act for textile merchants. To facilitate trade, the bank created the “nostro” (from Italian translated – “ours”) account book which contained two columned entries showing amounts of foreign and local currencies, information about the keeping of an account with a foreign bank. During the 17th (or 18th) century, Amsterdam maintained an active forex market. During 1704 foreign exchange took place between agents acting in the interests of the nations of England and Holland.

Early Modern History

1880 is considered by one source to be the beginning of modern foreign exchange, significant for the fact of the beginning of the gold standard during the year.

Before World War One there was a much more limited control of international trade. Motivated by the outset of war countries abandoned the gold standard monetary system.

Modern History

During the period between 1899 and 1913 countries foreign exchange holdings increased by 10.8%, while their holdings of gold were increased by just 6.3%. At the end of 1913 nearly half of the world’s forex trades were being performed using Sterling. The number of foreign banks operating within the boundaries of London increased in the years from 1860 to 1913 from 3 to 71.

In the earliest years of the twentieth-century trade was most active in Paris, New York and Berlin, while Britain remained largely uninvolved in trade until 1914.

Between 1919 and 1922 the employment of foreign exchange brokers within London increased from 2 to 17, in 1924 there were 40 firms operating for the purposes of exchange. During the 1920s the occurrence of trade in London resembled more the modern manifestation; by 1928 forex trading was integral to the business life of the city.

 The Bretton Woods Conference

At the end of World War Two, between the 1st and 22nd of July 1944, therefore, even before hostilities ceased, some 730 economists and politicians from the 44 allied nations gathered to make decisions about the financial world as it would be after the war. Some famous faces were present including John Maynard Keynes, who greatly influenced the proceedings.

Bretton Wooods

The conference was held at the Mount Washington Hotel in Bretton Woods, New Hampshire in the USA (pictured).

Up to this point the relationship between the main currencies was based on gold, hence the gold standard. International debts were settled in gold bullion. This was becoming problematic for several reasons. Not least of these was the fact that the USSR had most of the world’s gold reserves – not making for happy western politicians!

On the final day, an agreement was signed which brought into being the International Monetary Fund (IMF), The World Bank and The International Bank for Reconstruction and Development (IBRC). Major treaties were also signed such as the one that established the General Agreement on Tariffs and Trade (GATT).

The agreement also required the leading countries of the world to adopt a new monetary management system. The main features of the Bretton new system were an obligation for each country to adopt a monetary policy that maintained their exchange rates by tying their currency to the U.S. dollar which in turn was related to the value of gold. For example, the value of the USD was set at $0.2481 to £1 which in turn was set a worth of 0.5 Deutschemarks. Obviously, with fixed exchange rates there was no scope for trading Forex!

Post-Bretton Woods

The fixing of exchange rates in this way put a considerable strain on some economies, just as the Euro initiative is doing right now! On the 15th of August 1971 the USA broke ranks and unilaterally terminated the convertibility of its currency to gold. This immediately ended the Bretton Woods monetary management system. Many of the countries involved then adopted the US Dollar as their reserve currency.

Importantly many of the currencies that had been tied to the US Dollar were set to float freely at this time – this was the birth of the possibility for Forex trading to develop.

The rest, as they say, is history. We had to wait for technology to develop to open the way for us to trade from home. Computers and the internet had to become widely available. All that was required after that was for some enterprising businesses to put the availability of the market, computers and the internet together. In the UK, this was first done by IG Index, and they have remained at the forefront of what we can now call “the industry” ever since.