In order to gain a complete understanding
of what forex is, it is useful to examine the reasons
that lead to its existence in the first place. Exhaustively detailing
the historical events that shaped the foreign exchange market into
what it is today is of no great importance to the fx trader and
therefore we happily will omit lengthy explanations of historical
events such as the Bretton Woods accord in favor of a more specific
insight into the reasoning behind foreign exchange as a medium
of exchange of goods and services.
Originally our ancestors conducted trading of goods against
other goods this system of bartering was of course quite inefficient
and required lengthy negotiation and searching to be able to
strike a deal. Eventually forms of metal like bronze, silver
and gold came to be used in standardized sizes and later grades
(purity) to facilitate the exchange of merchandise. The basis
for these mediums of exchange was acceptance by the general public
and practical variables like durability and storage. Eventually
during the late middle ages, a variety of paper IOU started gaining
popularity as an exchange medium.
The obvious advantage of carrying around 'precious' paper versus
carrying around bags of precious metal was slowly recognized
through the ages. Eventually stable governments adopted paper
currency and backed the value of the paper with gold reserves.
This came to be known as the gold standard. The Bretton Woods
accord in July 1944 fixed the dollar to 35 USD per ounce and
other currencies to the dollar. In 1971, president Nixon suspended
the convertibility to gold and let the US dollar 'float' against
other currencies.
Since then the foreign exchange market has developed into the
largest market in the world with a total daily turnover of about
3.2 trillion USD. Traditionally an institutional (inter-bank)
market, the popularity of online currency trading offered to
the private individual is democratising forex and
widening the retail market.
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