The foreign exchange market, commonly known as “forex,” is the global market for the trading of currencies. It is the largest and most liquid market in the world, trading at a huge volume of $5.3 trillion a day, which is around $220 billion every hour.
While the current, modern Forex market is vast and incredibly liquid, it has not always been so. In fact, the modern forex market originates from as recently as 1970, when government restrictions on foreign exchange transactions were eased, shifting from the fixed exchange rate regime of the Bretton Woods system (devised and implemented between the major industrial nations after WWII) to floating exchange rates.
But at its root, the foreign exchange market has existed in more basic form for centuries. The typical foreign exchange transaction is where one party purchases a given amount of one currency with a corresponding amount of another currency. In this form, the foreign exchange market can be traced back to biblical times, when money-changers would help trade and commerce by ensuring that equivalent prices were paid for goods. For example, a Roman coin might have a higher gold or silver content than a Greek one, due to its size or weight. Therefore a trader could trade fewer Roman coins for more Greek ones. Since this was the case, money changers were also silver and/or gold-smiths so that they could literally change the coins into other ones.
In the 15th Century the now famous Medici family, founders of much of the modern banking system, opened banks in foreign locations to exchange currencies on behalf of textile merchants. Bills of exchange were issued, allowing a travelling merchant to deposit his money with a Medici bank in one city, and withdraw an equivalent amount in another city’s bank. This was a simple form of currency trading. Indeed, the Medici family would use these bills to move money between branches and make money by taking advantage of favourable exchange rates.
In the 17th and 18th centuries active an foreign exchange market was maintained in Amsterdam, and foreign exchange often took place in this market between agents acting for England and Holland. In the 19th Century the firm Alexander Brown &Sons traded foreign currencies, and were a leading participant in the exchange market in the USA.
In 1913, almost half of the world’s foreign exchange was done using the British pound sterling. There was a massive boom in terms of the number of foreign banks operating in London from the late 19th century up to this point as well. But the nation remained relatively uninvolved in international trade, until 1914. By 1922 there were 17 foreign exchange brokers in London, and only two years later this figure had more than doubled to 40 firms engaged in the sole business of currency exchange. By 1928 the forex trade was crucial to the financial functioning of the city.
After WWII, an agreement called the Bretton Woods Accord was signed which essentially fixed the exchange rates, allowing only a 1% range of fluctuation in currency prices. The end of this accord during 1971, replaced by the Smithsonian agreement which allowed trading to range to 2%, eventually brought about a free-floating currency system. From 1970 to 1973 the amount of trading occurring in the market increased threefold. However in 1973 the markets closed for two weeks as it became apparent that the current control regime was capable of balancing exchange instabilities.
1973 marked therefore the point when the forex market controlled by banks and nation-states of the past gave way to the floating, free conditions of the market we know today. So while the forex market today is fast-moving, highly liquid and vast in its scale, it was not always so.
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