Brief ForeX Market History

The system of exchange of one currency into another has existed since the days of the Roman Empire. Today, the forex market is the biggest financial trading market in the world, with over $1.5 trillion worth of deals done every day.

Prior to World War II, the forex market was steady and changed little: the same system used by the Romans was still the way most traders traded. During this period, few financiers made any money in the forex market. Society and governments looked unfavorably on currency speculation.

The changes between 1944 and 1973 impacted both the way the forex market itself worked, and the way financiers viewed trading in forex.

The change was due to Nazi Germany's attempts to undermine the value of the British Pound by printing millions of fraudulent notes which, at that time, was the standard by which all other currencies were valued.

Following WWII new measures were needed to control the forex market and currency speculation. These measures came together in the Bretton Woods Agreement, which established a system of “pegged” currencies. What this meant was that all major currencies of the world were pegged against the US dollar, which itself was pegged against the value of gold.

By 1973, the Bretton Woods agreement fell apart due to the emerging European Union and currencies started to trade under another system known today as “free floating”. The free floating system allows a currency's value to float against those of other currencies, depending on its strength.

Today, the majority of major world currencies move independently of one another and are actively traded for speculative purposes by banks, brokerage houses, and individuals. Central banks continue to intervene on occasion to attempt to move currencies to desired levels. This is the underlying factor driving today's forex market; the basic, on-going balancing act between supply and demand also plays a role. The free floating system is ideal for today's markets. Will this free floating system withstand the test of time? Will the US Dollar remain dominant in international trade and finance, or will the Euro ascend to this position?

Will we see the day when individual investors routinely buy and sell currencies just as they do stocks and mutual funds? Only time will tell. But one thing is certain: The forex market is gaining popularity.