This guide will explore the genesis of currencies and their trading, the progression of forex trading practices, and the present and anticipated trajectory of the forex market. Understanding the history of currency trading offers insights into the financial instruments traded today and the forces driving them.
Ancient Coin Trading
Around 6000 BC, tribes in what is now Iraq introduced the barter system, an early form of exchange. Commodities like salt and spices became prevalent trading items as this method grew. Neighboring regions, including the Babylonians and Phoenicians, adopted the system. The introduction of gold coins in the sixth century BC was a significant shift, given gold’s durability, uniformity, and divisibility. Yet, the absence of a standardized valuation for these metal currencies posed challenges in global trade. A notable solution was the Aegina “Sea Turtle” coin, a Greek silver currency recognized widely for international trade.
13th-18th Century Developments
In the 13th century, the Florentine Republic, now part of modern-day Italy, rose to prominence in Europe. They produced gold and silver currency, with the gold “Florin” setting a standard for global commerce. The powerful Medici clan of Florence founded the Medici Bank in the 15th century. As they grew, they established overseas banks to aid merchants in currency exchange. The Medici Bank’s “nostro” ledger, which tracked values in foreign and domestic currencies, was pivotal in advancing forex trading.
The Progression of Currency Exchange
Roughly 2500 years ago, the Greeks and Egyptians traded using gold and silver coins, determined by their weight and dimensions. The Roman Empire subsequently standardized the production of currency and introduced a state-regulated monetary transaction system, laying the groundwork for modern central banks. By the Middle Ages, copper became the favored metal for minting, producing coins of lesser value. Notably, during this era, the world’s most ancient bank, Monte dei Paschi, was founded in Italy, mainly to facilitate currency trade.
The Inception of the Forex Market & the Gold Standard
Amsterdam witnessed the birth of the first forex market approximately 500 years ago, leading to more stable currency exchange rates and global adoption. The Gold Standard, introduced in 1875, linked a country’s currency production to its gold reserves, ensuring currency value. However, nations printed more money post-World War I, marking the Gold Standard’s decline.
By 1913, London saw a surge in forex trading entities, with the Pound Sterling dominating trades. By 2013, it ranked fourth in global trade. The Bretton Woods system, introduced during World War II, aimed to replace the diminishing Gold Standard.
In the wake of World War II:
The initial decades of the twentieth century were characterized by notable economic and political upheavals shaped by the US Great Depression and two global wars. Following the cessation of World War II, several nations such as the United States, Canada, various Western European countries, Australia, and Japan came together to sign the Bretton Woods Agreement, aiming to foster stability in international economic interactions. This agreement permitted a 1% deviation from the established exchange rate for their respective currencies. Moreover, this era established pivotal institutions like the International Monetary Fund (IMF) and the World Bank.
In 1954, Japan enacted the Foreign Exchange Bank Law, which was pivotal in positioning Tokyo as a critical foreign exchange hub.
George Soros, the British Pound, and the Euro
In 1979, the Exchange Rate Mechanism (ERM) was introduced by European nations, mandating member states to adhere to a predetermined exchange rate value for their currencies. The UK joined the ERM in October 1990. However, the UK government faced challenges in maintaining its currency within the stipulated range, leading to a drastic increase in interest rates to 15% to bolster the British Pound’s value.
By 1992, sustaining the pound within the ERM proved untenable, resulting in its devaluation. Prominent currency speculators, including George Soros, capitalized on this, with Soros’ bet against the pound being recognized as one of the most significant currency trades ever. This event sparked debates over whether speculators like Soros were catalysts for the pound’s decline or merely capitalized on an inevitable downturn. This episode also highlighted currency speculation to the broader public. A decade later, the Euro was launched on January 1, 1999, with 12 European countries adopting it. Physical coins and banknotes were circulated from January 1, 2002, marking a historic transition from 12 previous currencies. Today, the EUR/USD is among the most traded currency pairs in the forex market.