A brief history of forex: How did it become the biggest market

A quick glance at the modern forex market tells us just how big and lucrative this entity is, with its cumulative global value now estimated to be in excess of $2.409 quadrillion.

These figures showcase just how far the market and the underlying principle of currency trading has come since its humble beginnings, which actually began way back in 1894 BCE.

We’ll review the brief history of the forex market below, while asking how this entity has grown at such an exponential rate since the 1970s.

The Pre-history of Forex Trading

It was in 1894 BCE that the Babylonian state first emerged, with rudimentary forex trading principles used to create a system for the exchange of currencies.

Typically, this system saw the exchange of gold for other tangible goods, with other precious metals such as silver also emerging as viable tools of transaction shortly afterwards.

The creation of coins and native currencies began with the emergence of sophisticated political regimes, particularly as gold became restricted as a viable trading tool. This led to the introduction of the so-called ‘gold standard’, which pegged national currencies to the value of gold.

However, the Great Depression of the 1930s frightened the public into hoarding gold as banking systems collapsed, making the policy completely untenable.

As a result, the UK formally abandoned the gold system in 1931, while the US followed suit two years later.

Beyond the 1930s and Contemporary Forex Trading

This was replaced with the so-called ‘Bretton Woods’ system in 1944, which was the first example of a fully negotiated monetary order aimed at governing global fiscal relations. It essentially pegged international currencies to the value of the US dollar, which was itself convertible into gold and widely used as the world’s most popular reverse currency.

However, the greenback began to decline in terms of its global influence through the 1960s, with the EEC and Japan becoming increasingly competitive in their own right.

This redistribution of power led to widespread dissatisfaction with the privileged role of the USD, with Bretton Woods being removed in the early 70s as the greenback began to float freely in the forex market.

This gave birth to the forex market that we recognise today, and while the US dollar remains the world’s dominant currency and leading global reserve, currency exchange rates are now determined by the market and a raft of wider macroeconomic factors.

Over time, the technological advancement has also made the forex market increasingly accessible, with this sector having evolved to include more than 170 currencies and underpin daily trading volumes of $6.6 trillion across the globe.

Innovation and the rise of online brokerage sites have definitely made the market more accessible to part-time traders, while the growth of minor and exotic currencies have also generated a wider range of options for traders.

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