Let’s find out the history of the forex market! Did forex trading begin 13.8 billion years ago with the big bang, or did it begin 4.5 billion years ago, when the Earth’s new tectonic plates began exchanging currencies?
Even though you may be shocked to learn that currency trading is not that old, it does have a long history dating back thousands of years. As usual, global events, politics, and technology influenced how people conducted forex trading.
In this article, we will look at the origins of currencies and forex trading, how trading currencies evolved over time and the current and future state of the forex market. The history of currency trading is not only fascinating, but it also helps you relate to the financial products traders trade every day and better comprehend the underlying dynamics.
Trading of coins in ancient times
In 6000 BC, Mesopotamian tribes (located in modern-day Iraq) developed the first method of exchange known as the barter system. They used the system to trade products via ship, and as the system expanded, salt and spices became the most common forms of exchange.
Bartering extended to the Babylonians (also found in modern-day Iraq) and the Phoenicians in the eastern Mediterranean, and the practice spread further. The use of gold coins in the sixth century BC marked the most major change in the trading system after thousands of years of use.
Because gold and other metals are resilient, consistent (a gram of gold is the same as another gram of gold), and easily divided, they became a medium of exchange. These characteristics make it very appealing to a wide range of people.
However, because there was no standard procedure for determining their value, metal-based currencies became difficult to use in international trade. One solution was to make use of coins made by a single trustworthy issuer. The Aegina “Sea Turtle” coin, a Greek silver piece produced in Aegina, a small island outside the coast of Greece, was the first currency extensively recognised for international commerce.
13th-18th century
The Republic of Florence (now part of Italy) grew to be a significant European and Mediterranean power in the 13th century. From 1252 through 1533, Florence struck gold and silver coins, with the gold coin, known as the “Fiorino d’Oro” or “Florin,” having a pre-determined gold content.
When other European countries began minting their own gold coins after Florence, the quantity of gold in their coins changed. As a result, the Florin quickly developed into the standard currency for foreign commerce in Europe and was used to determine the international value of other coins. Many historians believe that this was an early form of the gold standard.
The Medici family of the Republic of Florence formed the Medici Bank in the 15th century, which grew to become Europe’s greatest bank during that time period. The family became Europe’s wealthiest entity and a political dynasty, producing four Popes. They needed to create banks in foreign places as part of their commercial ventures in order to convert currencies on behalf of textile merchants. To enhance trade, the Medici Bank established the “Nostro” account book, which featured two columned entries displaying quantities in foreign and local currencies, therefore promoting forex trading.
Currency trading & the Forex market
The Greeks and Egyptians traded products and currencies using molten silver and gold coins 2500 years ago, and their worth was established by their actual weights and sizes. Currency minting was institutionalised 500 years later, under the Roman empire, and a government-run monopoly on money transactions was created. There is still a centralised monopoly-like system in place today, with central banks conducting monetary policy.
During the Middle Ages, copper ended up being the most widely used metal for coin minting and commerce. Therefore, through the use of copper instead of gold, lower-value coins could be created. Today’s one-cent coins in the United States are constructed of 2.5% copper and 97.5% zinc.
Around that time, the world’s oldest bank, Monte dei Paschi, was founded with the sole purpose of facilitating currency transactions. Would you have imagined that Italy is home to the world’s oldest bank?
The 1st forex market & the Gold Standard
The first forex market was created in Amsterdam some 500 years ago. The ability to trade currencies freely contributed to the stabilisation of currency exchange rates. Forex trades were introduced all over the world from Amsterdam.
The Gold Standard was implemented 240 years ago, in 1875. A country could only manufacture as much national currency as it had in gold reserves under the Gold Standard. The Gold Standard was intended to ensure the value of a currency. Following World War I, countries needed to print more money to cover their expenses, signalling the end of the Gold Standard.
In under ten years, the number of forex trading companies in London increased from three to 71 by 1913. Pound Sterling accounted for half of all forex transactions. In 2013, the Pound Sterling was the fourth most traded currency, after only the US dollar, Euro, and Japanese yen.
During World War II, the Bretton Woods system was put in place. It was intended to be a successor to the faltering Gold Standard.
After World War II
With the US Great Depression and two global wars, the first few decades of the twentieth century saw economic and political upheaval in the United States and other areas of the world. At the end of World War II, the United States, Canada, a number of Western European countries, Australia as well as Japan signed the Bretton Woods Agreement to establish economic relations. The agreement permitted their currencies to vary by up to 1% from the par exchange rate. The agreement also saw the establishment of the International Monetary Fund (IMF) and the World Bank.
George Soros GBP & the Euro
European countries established the Exchange Rate Mechanism (ERM) in 1979, which forced member countries to keep their currencies within a fixed exchange rate value. Britain became a member of this mechanism in October 1990. The British Government, on the other hand, fought to keep its currency within the agreed-upon range and had to hike interest rates to 15% at a point to support the value of the British Pound.
Eventually, maintaining the pound within the ERM became inefficient, and the Pound’s value decreased in 1992. Currency speculators, most notably George Soros, gained billions by selling the pound. One of the biggest currency trades of all time has been described as Soros’ trade against the British pound. There has been substantial discussion regarding whether speculators like Soros contributed to the currency’s depreciation or just benefitted from an unavoidable fall. The incident was also remarkable since it was the first time many people had heard of currency speculation. After a decade of planning, the Euro began operating on January 1, 1999, with 12 European nations participating. On January 1, 2002, coins and banknotes were introduced, and the largest cash changeover in history occurred from 12 prior currencies. The EUR/USD currency pair is now the most liquid and extensively traded of all currency pairs in the forex market.
