The roots of Forex trading can actually be traced way back to ancient history. People back then implemented a barter system of exchange in the absence of currencies.
In this method of exchange between traders, services and goods that may be purchased are paid for with another service or good that possesses the same value instead of with money. However, this method was too limiting and had to be done away with, and this paved the way to the use of money in its earliest forms.
Earliest Forms of Money
Evidence from archaeological studies on the Babylonian times revealed that people in those days already used receipts, and even kept records of their transactions. Regular items like teeth or stones were utilized to serve as their money until people started using precious metals.
Coins from Precious Metals
These became the popular form of currency due to their rarity, higher value, durability, and the ease involved in carrying them. What further adds to their importance as coins as a form of currency is their ability to be produced with the same weight. This ensures that each coin formed is worth the same amount as the other.
For centuries, coins have been the standard of choice in trading. Later on, printed notes were produced to serve as legal tender. Printed notes are now the standard forms of currencies all over the world.
Using Gold as a Standard
Eventually, each printed currency was produced with a small amount of gold attached to its back. This currency could be brought to a bank an exchanged for a certain amount that equals the value of the gold printed to it. The gold standard was then later implemented in 1875.
Development of the Exchange Rate
Several countries started backing their printed currencies with gold, which was then used to assign values to them. This led to the development of the exchange rate system, wherein currencies were assessed to determine what size was required to buy an ounce of gold.
Breton Woods System
After World War I, gold became a scarce commodity, and the gold standard was done away with. The Breton Woods system of creating exchange rates was put in place, which identified the US dollar as the global reserve currency.
A free-floating system was adopted after the Breton Woods system was also put to rest due to the US not having enough gold reserves to support the increasing demand for printed currencies. This led to the development of the Forex trading system, wherein independent traders have the ability to “float” with the fluctuations that currencies go through. Demand and supply determine how these fluctuations affect currencies around the world. Once available only to banks and other big financial institutions, Forex trading can now be done online by retail traders.