Lesson 3: A Brief History of Forex Trading

The forex market wasn’t always the bustling, lively, and welcoming environment you see now. 

Believe it or not, there was a time when individual traders couldn’t even dream of trading in it. 

Fortunately, the forex market has undergone many transformations since then. 

In this lesson, you’ll be taking a trip down memory lane and learning how the forex market changed with the times – evolving from clunky and massive computers to sleek, pocket-sized phones. 

Lesson Highlights 

• Most currencies’ values were fixed to gold before the Bretton Woods Agreement. 
• The Bretton Woods System pegged the prices of most of the world’s currencies to the US dollar. 
• While initially successful, the Bretton Woods System eventually collapsed and paved the way for the modern currency exchange system. 

Where It All Began 

Forex trading, as you know it today, did not exist until the early 1970s. 

Before the US dollar became the alpha currency in the forex market, countries pegged the value of their national currencies to gold. This gave rise to the term “gold standard,” which is also what you call the prevalent monetary system back then. 

The practice of fixing currency value to gold goes as far back as 19th century England. However, the aftermath of World War 2 and the Great Depression necessitated restructuring the world’s monetary system. 

Bretton Woods Agreement 

With most of the world’s economies in shambles, the US rose to prominence and established itself as a global powerhouse, militarily and economically. This is a relevant point in this history lesson. 

In July 1944, 44 representatives from Allied forces countries met in Bretton Woods, New Hampshire, in the US. The delegation tackled the need to stabilize the global economy following the ravages of war and economic recessions. 

The Bretton Woods Conference led to the creation of many things you’re probably familiar with today, such as: 

• The International Monetary Fund (IMF) 
• The World Bank 
• The basis for the modern-day exchange rate system 

Under the Bretton Woods System, many of the world’s currencies pegged their value to the US dollar instead of gold. In turn, the US dollar’s value was fixed to gold at $35 per ounce. 

This new system eventually collapsed in the 1970s when the US could no longer sustain the amount of US dollars circulating globally. In 1971, then-US President Nixon suspended the dollar’s convertibility to gold. 

A New System Is Born 

The Bretton Woods System’s failure precipitated the global transition into the floating exchange rate system still used today. 

The new currency exchange system allowed the currencies of major countries to “float” against each other. Instead of the US dollar, currency values are now governed by a more dynamic factor, market forces. 

The Early Days of Forex 

The establishment of a new exchange system saw the beginning of an increase in currency price speculation. It was the start of the forex market as you know it today. 

But the forex market was a lot more exclusive back then. In its early years, only banks, hedge funds, and mega corporations had access to the forex market. 

Retail trading wasn’t even a concept in those days. 

The Internet Opened the Gates 

The advent of the Internet Age in the late 1990s was a significant contributor to the emergence of retail trading. 

With banks creating proprietary trading platforms, it didn’t take long before companies developed trading platforms that relied on the internet. 

These internet-based platforms became known as “retail forex brokers.” Contrary to interbank transactions usually trading millions of units per transaction, retail forex brokers let people open positions as little as 1,000 units. 

The widespread availability of personal computers during the same time was also pivotal to the increase in the retail trader population. Computers gave individuals a way to trade in the forex market quickly and conveniently, right in their homes. 

The Age of Retail Trading 

The ‘90s dot-com era democratized trading, giving everyone equal access to the financial markets. 

As with any emerging market, many institutions were quick to piggyback on retail trading’s rising popularity. The early 2000s witnessed a boom in the number of online brokers offering their services to retail traders. 

These brokers lured clients with educational resources in trading and – more importantly – access to leverage. Unlike today, where informative articles about trading are a dime a dozen, these were prized commodities back then. 

Competition for clients was as tough back then as it is today. This led to lower trading costs, tighter spreads, and more diverse currency pair offerings. 

Where There’s Trade, There’s Rules 

It wasn't long before the increasing number of retail traders – mostly private individuals with modest capitals – caught the attention of financial regulators. 

These monetary authorities sought to protect retail traders from opportunistic brokers seeking to cheat them off their money. 

They implemented regulations that governed the way brokers operate and ensured their integrity and reliability. 

Now that you’ve become familiar with the history of retail forex trading, it’s time to learn about the major economies that make the forex market go round.