The Foreign Exchange market, “FX or FOREX” as we know it today, originated in 1973 and is now known as the “Free Floating System”. However, money has been around in one form or another since the pharaohs of the Egyptian empire which introduced coinage. 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. It made foreign exchange much easier for merchants and traders and caused the regional economies to flourish.
The Bretton Woods Agreement
In 1944, nations attempted to stabilize international currencies in the Bretton Woods Agreement. Realizing that speculation in national currencies contributed to destabilization, nations agreed to measures that would restrict the flow of money from one country to another. Nations promised to try to maintain the value of their currency against the dollar, whose value was correlated to a certain amount of gold. However, the dramatic increase in world trade, beginning after World War II, led to staggering amounts of capital flowing globally.
Free Floating Currencies
In 1971 and 1972 two more attempts were made at free-floating currencies against the U.S. dollar, namely the Smithsonian Agreement and the European Joint Float. The Smithsonian Agreement was simply a modification of the Bretton-Woods accord with allowances for greater fluctuation, while the European Joint Float aimed to reduce the dependence of their currencies on the dollar. After the failure of both of these agreements, nations were allowed to peg their currencies to float freely , and were actually mandated to do so by 1978 by the IMF. The free-floating system managed to hold out for several years, but many denominations failed against the stronger currencies.
European Monetary System
The European currencies were among those that were affected the most by the strength of the US dollar, and the British Pound. In July of 1978 the European Monetary System was created to counter the dependency on the US dollar, but by 1993 it was clear that the attempt had failed.
The Introduction of the Euro
Although Europeans were already comfortable with the concept of forex trading, the rest of the world was still unfamiliar with it. The establishment of the European Union in 1992 gave birth to the Euro seven years later, in 1999. The Euro was the first single-currency used as legal currency for the member states in the European Union. It became the first currency able to rival the historical leaders in the Foreign Exchange market and create the stability that Europe and the forex market had long desired, thus creating a truly global forex trading market.