History of Forex

The Foreign Exchange market originated in 1973. However, money has been around in many forms since the time of the Pharaohs. The Babylonians are credited with the first use of paper bills, and receipts. Middle eastern moneychangers were the first currency traders exchanging coins of one culture for another. During the middle ages, the need for another form of currency besides coins emerged as the method of choice. These paper bills represented transferable third party payments of funds; this made foreign exchange much easier for merchants and traders and caused the regional economies to flourish.

Forex Timeline

1944

Bretton Woods Accord is established to help stabilize the global economy after World War II.

1971

Smithsonian Agreement established to allow for greater fluctuation band for currencies.

1972

European Joint Float Established as the European community tried to move away from their dependency on the US dollar.

1973

Smithsonian Agreement and European Joint Float failed signifying the official switch to a free-floating system.

1978

European Monetary System introduced to again try to gain independence from the US dollar.

1978

Free-Floating system officially mandated by the IMF.

1993

European Monetary System fails making way for a world-wide free-floating system.

2000

Commodity Futures Modernization Act of 2000 made trading the Forex possible for U.S. investors.

2003

Compass FX begins offering services to clients previously unable to enjoy the opportunities available in the Foreign Exchange market.

 

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During the Middle Ages to WWI, the Forex market was relatively stable and without much speculative activity. After WWI the Forex market activity increased ten fold even though the Great Depression in 1931 created a serious lull in Forex activity. From 1931 until 1973, the Forex market went through a series of changes such as the Bretton Woods Accord which occurred toward the end of World War II.

WWII vaulted the US dollar from a has been currency after the stock market crash of 1929 to the benchmark by which most currencies were compared. The Bretton Woods Accord was established to create a stable environment by which global economies could re-establish themselves. The Bretton Woods Accord pegged world currencies to the US dollar and the US dollar was pegged to gold at a price of $35 per ounce. Pegging the dollar to gold and the pegging of the other currencies to the dollar brought stability to the world Forex situation.

In December of 1971, the Smithsonian agreement allowed for greater fluctuation band for the currencies. In 1972, the European community attempted to move away from dependency on the dollar by establishing the European Joint Float between West Germany, France, Italy, the Netherlands, Belgium and Luxemburg. Both agreements failed to accomplish their objectives and collapsed in 1973 signifying the official switch to the free-floating system. Governments were now free to peg their currencies, semi-peg or allow them to freely float. In 1978, the free-floating system was officially mandated. Europe tried, in a final effort to gain independence from the dollar, by creating the European Monetary System in July of 1978. This, like previous agreements, failed in 1993.

The major currencies today move independently of other currencies. The currencies are traded by anyone who wishes. This has caused a recent influx of speculation by banks, hedge funds, brokerage houses and individuals. Central banks intervene on occasion to move or attempt to move currencies to their desired levels. The underlying factor that drives today's Forex markets, however, is supply and demand. The free-floating system is ideal for today's markets.