A wise man once said “You cannot predict the future until you know the past.” When you think about it, forex trading is all about prognoses – what will happen and how to trade that the future changes be to your advantage. So if what we are dealing with basically is predicting the future, we should know something about the past of forex trading.
Man has used money in one form or another since.. well since we came to exist. Through the years, people have used different things to count as money including cattle, salt, fabrics and ultimately – gold and silver coins. Gold and silver became universal quite quickly, but those valuable metals were hard and risky to transport at long distances to be used for trade, so there had to be another way. Thus came the idea of local currency.
But local currency came with another problem – how much of one currency would be another currency’s value? The only logical thing at the time was that a currency’s value will be directly proportional to the gold reserves of its country. So for example if one country had 1000 gold pieces in reserve, while another had 2000, it would need 2 gold pieces of the first country’s currency to buy one piece of the second country’s currency. This became to be known as The Gold Standard and around 1880, it was accepted and used worldwide.
At the moment it could be told that all was fine, until The First World War. When it began, the need for money was greatly increased and by pure physical view – the money were not enough. So the paper money were created – in amounts far exceeding the gold reserves. The Gold Standard no longer applied and as for the balance in exchange of currencies – it was completely demolished.
In 1929 the stock market crashed, causing major financial impact all around the world, especially the US, and acting as the start of The Great Depression. During it, the dollar’s value fell dramatically and the foreign exchange dealings were minimized.
At the end of the Second World War, a meeting was held in New Hampshire. This meeting will be known as The Bretton Woods Conference (1944) and it attempted to resolve the major problems of postwar Europe. Two financial institutions were formed then to facilitate those objectives, the International Monetary Fund (IMF) and the World Bank. The World Bank’s first act was in 1947, when it loaned France 250$ million to stabilize its economy.
But a very important (and probably the most important) decision made during the three-week conference was the decision of establishing an international monetary system of convertible currencies, which had fixed exchange rates. This agreement was aimed to prevent currency competition; under that system, the countries’ currencies could be converted into US Dollars at a fixed rate and the dollar – into gold also at a fixed rate, thus the US dollar replaced the then-dominant British pound. The forex trading was pretty much dead until 1971.
In 1971, the US under president Nixon devalued their currency, forcing realignment of all with the dollar. This started a “currency war” with the European nations, which however did not last long and by the end of the first half of 1970-s, the Bretton Woods Exchange System was left for good by leading countries, thus floating their currencies into the market at non-fixed rates. So there was the exact same problem from about one hundred years ago – how to decide the value of each currency?
In this new, market driven world, the answer was quite simple – let the market itself decide. Based on the demand and supply of a currency, its values change – when the demand of a currency is high compared to its supply, the rates go up. When the supply is high however, much higher than the demand, the rates go down. These movements are triggered by many things – political and economical stability, social events and many, many more. I’ve thought about the “big traders” being able to affect the market with flooding it with a currency when they want its price lowered or buying much of it when they want its price higher. However, due to the liquidity of the market’s currencies (liquidity meaning the amount of currency being traded), it is quite hard to affect it by themselves and their capital alone.
So this is basically the market we know today and that is all I know about its history. If you want to know more, find a nice book – like First Forex Trading Academy’s book of forex courses – it is the one I learned enough from to write this article. There are certainly many others, you just have to look for them.
But wait! I forgot to tell you how this will affect your trading. Well, knowing the history of the forex market itself will not, but it sure is interesting (to me at least). But if there is anything you learned from this article, let it be this – before you start trading with a pair of currencies you’ve decided, make sure to check all you can for the countries’ economic and political movement and how it affects its currency for the last month or two. This will help you understand and predict what will come next and putting that information into good use will earn you a lot of money. Isn’t that what we are all here for?