The History of the Forex Market: From Bartering to Advanced Trading Platforms

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Although online retail forex trading is almost three decades old, in its rawest form, it dates back to ancient times. Whether it was the Mesopotamia tribes or the Medici family, this market was necessary.

Documenting how forex started needs one to look at key moments from different eras.

6000 B.C to 6th century B.C.: the birth of bartering and gold coins

It's a no-brainer to briefly uncover the history of money to see how forex began. Historians generally agree bartering kickstarted everything in 6000 BC with the Mesopotamia tribes. The concept was to trade services or goods without a medium of exchange.

People swapped anything from food and weapons to spices and even salt. Bartering first happened locally before ships from other regions sailed to trade in an early form of foreign exchange.

Chroniclers suggest that bartering lasted until about the 6th century B.C. It was now the era of coinage. It was now the era of coinage. This was a natural transition since traders were already bartering with various metals.

Historians recognize the Lydian stater, a coin made of gold and silver, as the first official currency minted by King Alyattes.

618 A.D to 1875: launch of paper notes and first forex markets

People used coins for many years, with copper, zinc, and alloy being the go-to minting metals. Meanwhile, an innovation was brewing in China's Tang dynasty from 618 A.D.

Among other challenges, the main problem with coins was that they got too heavy. So, merchants in China would give promissory notes or receipts of deposits.

Here, people would leave their coins with a trusted party in return for a slip. Then they could redeem their coins by handing in the receipt. This practice of 'backing' notes carried on well into the gold standard. Still, note-based money only became prevalent globally in 1661.

Chroniclers recognize Sweden's bank, Stockholms Branco, among the first to issue a proper banknote. It wasn't long before the trend spread across Europe. Eventually, in 1690, the United States joined the party, introducing IOUs to the mix.

By and large, historians pinpoint the first forex market to occur in the 17th century between England and the Netherlands. Soon, international trade between Europe and North America increased with the notes.

This led to the ruling classes in each nation buying currencies from other countries.

1821 to 1944: the gold standard and its gradual decline; free-floating currencies

The next major forex shift was the gold standard. England is regarded as the first country to adopt this practice in 1821, thanks to their considerable discoveries of the precious metal. Among other benefits, the standard prevented inflation and stabilized exchange rates.

1875 was the year that the gold standard existed internationally. It started with the United States before spreading to other countries. In short, governments would provide any amount of money for an equivalent gold value.

This standard flourished from this period until World War I, involving many nations in Europe, the Middle East, and the United States. Countries found that paying for the war became expensive.

Along with this, the limited supply of gold fell behind economic growth. This meant that keeping the money-gold ratio was going to be challenging. Thus, the gold standard gradually declined as the British pound and US dollar became the de facto currencies into World War II and beyond.

1944 to 1973: start to end of the Bretton Woods agreement; free-float currencies

In July 1944, about 14 months before the end of World War II, delegates from 44 countries came to form the Bretton Woods Agreement. Here, the US dollar became the measuring stick for other currencies while being gold-backed.

This system achieved its intended purpose of having the most efficient forex system. However, by 1971, the United States' gold supply became too low for the number of dollars people needed.

In August of that year, President Nixon famously announced the end of the Bretton Woods agreement. Thanks to the Smithsonian Agreement, the US dollar would get pegged to other countries' currencies rather than gold.

This lasted until 1973, when nations decided to use free-floating currencies. This replaced the fixed exchange rates used in this and prior eras. Instead, supply and demand forces would determine the value of currencies, a game-changer in forex.

1973 to 1996: increase in technology; introduction of forex brokers

1973 was also significant due to Reuters introducing computer monitors to transmit financial data. The days of telex machines and telephones were slowly fading.

The news agency introduced further technological enhancements in 1987 with Thomson Reuters Dealing and Thomson Reuters Matching in 1992. Before these periods, forex happened between banks who phone-called each other through 'voice brokers' and 'squawk-box speakers.'

Yet, Reuters' inventions shifted this tedious voice and paper-based system to price displays on screens. The internet's rise in the early 1990s also slowly moved forex from financial firms to the average Joe. Ordinary individuals now could also participate via the phone or in person.

1996 till date: introduction of the first trading platform; expansion of forex brokers

Refco launched what many consider the first retail forex trading platform called Dealbook. It had the typical features of viewing real-time quotes and placing trades.

Although it's hard to pinpoint the first-ever forex broker, brands like the IG Group, FXCM, and Interactive Brokers started to offer their services publicly after 1996. Over the years, more brokers came onto the scene, resulting in more participants and decentralization.

What began as basic trading platforms incorporated advanced charting and technical analysis tools.

MetaQuotes, the developers of MetaTrader, released their first charting software in 2002. But it wasn't until 2005 that they found incredible success with MetaTrader 4, becoming the go-to forex trading platform even today.

Summary

Forex consists of interesting transformations in monetary systems spanning many centuries. We have gone from bartering to coins to notes to the gold standard and fiat money.

Then, technology and the internet came along, resulting in the world's largest financial market. While forex is not perfect by any means, its substantial demand will continue as time goes on.

This article is brought to you by Fozzy​: a Forex VPS provider with 11 years of experience.