Trading between individuals has been there for as long as man’s presence on earth and developed from bartering goods. This way of expressing the value of goods in the terms of other goods set the base for a marketplace in which people needed a better way to express the value of any item. Thus, the bartering of goods and buying and selling with such things as teeth, pretty stones and feathers gave way to dealing with metals, particularly silver and gold. It became the accepted method of payment and a rather reliable way of measuring storage of value.
Each country minted their own coins out of the metal of their preference and as countries began to have better and stable political establishments the introduction of paper currency was introduced during the Middle Ages and sometimes even before that in certain regions of the world. And so began the journey of modern currency.
Prior to World War I, the central banks of most countries used gold to support their currencies. In theory paper money had the ability to be converted to gold although it was not done often. Sometimes countries had ballooning supplies of paper currency even though they lacked the necessary gold cover and this resulted in overwhelming inflation and so on to political instability. Increasingly, foreign exchange controls were introduced in a bid to stem the market forces from being impacted negatively by monetary irresponsibility.
Towards the end of the Second World War in 1944, the Bretton Woods agreement was initiated by USA where the suggestion of John Maynard Keynes for a world reserve currency gave way to a system built with the US dollar as the base. The Bretton Woods agreement brought about a system consisting of fixed exchange rates partly displacing the gold standard and setting the USD 35/oz as the intended permanent standard of evaluating currencies. This was also not a practical way to reach an acceptable system and collapsed during the seventies with the suspension of gold convertibility and the dollar had to relinquish its place as the sole international currency as it came under pressure from growing trade and budget deficits.
During the decades that followed foreign exchange trading grew to be the biggest ever market with a global presence. Many countries have lifted restrictions with regard to capital flow and this has resulted in foreign exchange rates adjusting according to their perceived values. Devaluation of many currencies around the world against the US dollar had made them vulnerable.
This volatile environment in currency exchange opened up a new playground for investors and financial institutions in the way of the Forex market as we know it today. It has gained huge proportions as a global market with trading of nearly three trillion dollars worth of foreign exchange each day and is far ahead of the world’s combined stock and bonds markets.