What Is Forex | History of Forex Market
Forex means foreign exchange which can simply be notated as Fx. It is the process of exchange or conversion of one currency to another.
Investopedia defines Foreign exchange as “the global market where currencies are traded virtually around the clock”. As an example, if an American traveler visits Europe has to convert his currency from US dollars to the Euros at the local exchange shop. Long ago when there was no money, coins or currency people used to exchange goods like crops, fish, grains, etc and the whole process was called as Barter. During 2600 B.C. Egyptians started using gold as an exchange because of the qualities it possesses and gold was considered very rare metal to find which increased its value. By the time arrived around 1500 B.C. countries started converting gold for goods and vice versa. By 700 B.C. coins were assigned a value so that the goods/services of the same worth can be exchanged in return for the value of coins. Paper money started being used across the Europe in the 18th century.
This practice has become very popular in Europe however, other parts of the world were still stuck with old exchange forms. Since there were no proper exchanges done between countries the gold standard came into existence in the year 1875. It simply ensures the currency is properly backed by the proportional gold reserves of a country. Using this method, countries were able to easily exchange the currency. But as the world has undergone two world wars after this period, countries were printing more currency without proportionate gold reserves they actually posses.
Later this resulted in imbalances during the exchange of currencies between the countries and the gold standard lost its relevance. As a solution for this, Bretton Wood agreement replaced gold with US Dollar for all the countries to exchange currencies maintaining respective fixed exchange rates to the US Dollar. Bretton Woods formulation resulted in 3 major outcomes
1) Fixed Exchange Rates
2) USD as primary currency reserve
3)Creation of International Monetary Fund and World Bank.
As the gold reserves of the US started depleting in 1971 Richard Nixon closed the gold window by changing Bretton Wood rule which entirely made it ineffective. This whole process leads to a situation called Nixon shock that resulted in free floating of currencies which is still effective today which we call Forex Market.