The earliest form of trading currencies was actually meant to facilitate the international commerce.

However, there is no way we can learn about the history of forex trade if we don’t know the history of money because in forex trade, it is all about money.

Money is traded for money so it is important to learn about the history of money too.

History of Money

In the ancient times, long before the existence of our great-great-grandparents, people still exchanged goods and services.

However, there was nothing like money in those days and the value of goods was measured by other goods.

This exercise was known as barter trade. So it is important to note that people in the early days did not lack anything because they had no money, they simply exchanged what they had for what they did not have or what they required at the time.

Bartering also had its disadvantages. It took time to get someone and convince them that they needed what they had in exchange for what they did not have.

This could have been one of the reasons the ancient people decided to come up with a way of having one unit to act as a unit of exchange.

Something called money was therefore introduced and people stopped worrying about having enough fish to trade for bread, or having to convince someone to help them hunt down an animal in exchange for an axe.

Instead, they had coins and notes to help them acquire what they needed. Money has evolved over the centuries and has experienced incredible changes and increase in value over time.

The history of money dates back to the 6^th Century BC though during those times, many people were still inclined to barter trade. It was not until the 13^th Century when Chinese emperors decided to experiment on a different form of trade, where one would not have to lose items in order to acquire others.

They started using cowry shells as a means of trade. For this reason, money got its definitions from the three basic roles that it played to the people in the olden days and still does the same even to the modern societies.

Money was seen as a store of value meaning it gives you the liberty to push the date of its use to a later time when you really need to use it. You can keep money for as long as you want without having the fear of it going stale. Money is also said to be a unit of account.

This is to say that it allows you to give the value of different goods without having to compare them. Money is also said to be a medium of exchange meaning you can easily exchange goods and services as long as you have money.

During barter trading, it was not a guarantee that you would get someone who needed what you had in exchange for what you needed so with the evolution of money, trading became easier.

When money evolved, it was not a universal currency as every territory had its own distinct unit of currency.

Some people used cowry shells or metal coins while some more developed territories used pieces of paper, of course, with some pictures of historic landmarks of their territory to look unique.

The value of the money actually did not come from its physical appearance, the value basically rested on the idea that money was a unit of value, a medium of exchange and a storehouse of wealth.

Money made it easier for people to trade their wares and still save up for some other purchase in the future.

As the centuries came and went, the appearance and value of money changed and improved respectively as different currencies for the different territories that kept coming up also evolved.

People therefore discovered the need to trade not only goods and services but also the different currencies.

Evolution of Forex Trading

Forex, short for foreign exchange, is the exchange of international currencies. It is the most liquid and dynamic market in the world and it is also known as currency trading, FX exchange or forex trading.

Forex trading traces its history centuries ago when different currencies came up and the need to exchange them arose.

The people known to have come up with the idea of exchanging currencies were the Babylonians. They are also credited with the first use of paper notes and receipts.

When forex trading began in Babylon, it was not about the money alone. People traded for other valuable items like teeth, feathers, and precious stones.

Then the discovery of gold, silver, and bronze emerged and it aided the making of the first coins, which were used as a medium of exchange.

When gold, silver, and bronze were discovered, the need to have banks also arose and the first banks were built to help people trade their wares for gold, silver, and bronze.

The history of forex exchange continues way into World War I. The 2^nd World War in 1939 brought great depression to economies but ironically, the forex markets stood strong.

In 1944, there was an agreement that was signed to reconstruct the international monetary structure even though World War II, which broke out in 1939, was raging.

The conference in which the agreement was signed was called the United Nations Monetary and Financial Conference and was held at Bretton Woods in New Hampshire in the United States hence the name Bretton Woods Agreement. It was signed by the delegates in attendance on 22^nd July 1944.

This agreement established the rules and regulations for financial and commercial associations among the world’s largest industrial and commercial states.

It was also during this conference that the World Bank was founded and both the International Bank for Reconstruction and Development (IBRD) and the International Monetary Fund (IMF) were established under the flagship of the World Bank.

It was also at the Conference in Bretton Woods that the exchange rate was fixed, and the US dollar became the strongest currency then. During those times, the exchange rate was permanent but this has since changed.

In the modern economies, the exchange rate fluctuates depending on the strengths and weaknesses of the different currencies.

After the Bretton Woods Agreement’s signing, the forex market became the largest and greatest global world market in history. There were no restrictions and no borders. Forex trading was open to anyone, brave enough to venture into the world of currency trading.

There were lots of opportunities and many chances with possibilities of making profit. Europe, for instance, created its European Monetary System in 1979 and fixed its currency trading rates then.

The forex market improved majestically over the years and companies, big and small alike, had the difficulty of standing strong with the ever-changing currency environment but the winners were the investors who found a new place to invest their money, the forex market!

From central banks to governments, trading forex became ‘the in thing’. Trading had truly evolved from exchanging feathers and stones, to exchanging Dollars, Francs, and Pounds.

Until just a few years ago, the forex market belonged only to banks and large financial institutions but over the years, companies, governments, and even individual investors have entered the forex market and engaged in currency trading.

With the high number of people engaging in forex trading, forex brokerage firms have sprouted to help people entering the forex market every day.

In the early years of currency trading, people used manual trading through phones to know when to place an order. However, with the modern advance in technology, automated and online currency trading have come into existence and this has opened doors to instant execution of trades.

Online forex trading brokerage firms have taken advantage of technology and improved their services.

They have introduced the most advanced and user-friendly trading platforms for their clients. This has made online forex trading to be the most sought out alternative for trading activities.

Click here to read this article on this site on how to trade forex.

Advertisement

Collapse of Bretton Woods Agreement in 1971

Forex trading continued to be a vibrant venture until the early 1970’s when the world got a shock from President Richard Nixon, the then president of America, when he issued an order to suspend the convertibility of gold in August 1971.

The Bretton Woods Agreement started undergoing a lot of pressure as the economies started moving in different directions in the late 1960’s. Several re-alignments of the agreement kept it going strong but not for long.

The US continued to experience increased budget and trade deficits and its gold coverage deteriorated at an alarming rate.

The increased budget and trade deficits made the dollar unfit to be the sole international currency. The biggest blow for the US came in 1970 when the Vietnam War was raging and this accelerated its inflation.

Eventually, the collapse of the Bretton Woods Agreement came in August 1971 when President Nixon issued an order in accordance with the Economic Stabilization Act (1970) to stop the convertibility of gold in the US dollar.

This meant that the US dollar could not be converted to gold directly except in the open market. With the Bretton Woods Agreement’s collapse, exchange rates ceased to be the major mode for governments to set their monetary policies.

After the collapse, the forex market evolved into one of the largest global markets with little or no restrictions at all on the capital flows since most countries had done away with them.

The traders were therefore free to adjust the market forces so as to fit their own values and preferences.

Structure and division of industries into sub-levels of power and liquidity

Liquidity is how trading interests in a market are measured; that is, the ability of a trader to sell out without affecting the price or value of the commodity being sold.

Currency trading is known to be one of the most liquid markets in the world, with billions of transactions occurring every single day. But one thing to note is that liquidity varies especially when the economy goes down.

Liquidity in the forex market determines the depth of open trade orders, the bid for the currency pair, resistance to price changes, and the monitoring of the central bank policy.

Liquidity of the forex market can be affected by the time or day when the market opens and the change in the economy. In particular, when the economy falls, it often has a great effect on the liquidity of the forex market.

Currency trading initially belonged to the big banks and other big financial institutions and governments but with the evolution of the forex industry, that saw other companies and even individual investors enter the forex market, there was a need to have rates that would suit the different ranks of traders that entered the market.

These rates were therefore fixed according to the structure and division of the players in the market into sub-levels of power and liquidity.

1. EBS Rate for Big Banks

EBS, which stands for Electronic Brokerage Systems, is one of the main interbank forex trading platforms, the other one being Reuters’ Dealing 3000. EBS is one of the largest foreign exchange money making banks in the world.

In fact, the only competition it has is the Reuters’ Dealing 3000. It is a platform for several currencies, including EUR vs. USD, USD vs. JPY, EUR vs. JPY, USD vs. CHF, and EUR vs. CHF.

EBS is an award winning forex trading platform and it has been at the heart of FX trading for almost 20 years now. It has over the years remained the benchmark for FX trading and connects buyers and sellers of foreign currencies in over 40 countries across the world.

It is a trusted source of genuine liquidity across all currencies. It facilitates a healthy FX market relation among its traders and also delivers all the opportunities that a trader would require to exchange currencies with other traders.

EBS has different interest rates for the different traders that it has in its platform. The rates for the big banks are variable depending on the time of day that the trades are opened, though most rates are often between 4.33% and 4.90%.

2. FX Rate for Retail Customers

Foreign exchange rate is the price at which a pair of currencies can be bought or sold. For instance, if the rate of EUR to USD is 1 to 1.228, it means that for every 1 euro, you get 1.228 US dollars. However, these rates vary every now and then.

Many people make the mistake of checking the foreign exchange rates on the websites then expect to trade on the same margins when they get to their transaction points.

This is a mistake that people are advised to avoid. The rates on the websites only act as references. When you actually get to the transaction point, they have added a margin to their transaction because of several variables like the size of the trade or the length of time they are guaranteeing for the quoted rate.

Banks, for instance, have fairly expensive rates especially when their retail customers want to sell their own currencies and buy foreign currencies. This rate is known as retail exchange rates. The rates are often between 3-6%, though sometimes it can get higher than this.

3. FX Rates for Fortune 500 Companies

Fortune 500 Companies are a list of the largest companies in the world compiled by the Fortune Magazine. The magazine comes up with the list based on the amount of revenues for both public and private companies.

Some of the top fortune companies are  ABN AMRO Holding, J.P Morgan Chase and Co., Kansai Electric Power, Magna International, FedEx, Dominion Resources, Delta Airlines, Qwest Communications, US Postal Service, T&D Holdings, Canadian Imperial Bank of Commerce, East Japan Railway, Indian Oil, J.C. Penney, Cardinal Health, and Landesbank Baden Wuttemberg, among many others.

The foreign exchange rates for these companies are totally different from the rates offered to other companies and are definitely higher since the Fortune 500 Companies are big companies that have annual huge returns.

4. FX Rates for Small Companies and Community Banks

However small a company may be, as long as it is trading internationally, the forex rates will definitely have an impact on its growth. The currency rates for such small companies only depend on the strength of the currency they are trading with.

When trading with another country, you buy the goods using the currency of the country you are trading with.

For instance, if UK is buying goods from US, they have to pay in USD and this only works to their advantage in case the dollar is not very strong. Therefore, currency trading rates for small companies depend on the strength of the currency being traded.

5. FX Rates for Large Hedge Funds

Basically, to hedge means to try to reduce risks. A hedge fund is therefore an investment fund that is privately owned and managed with the help of a set of strategies with a goal of gaining high returns.

Since they are privately owned, hedge funds require a minimum number of accredited investors and require a large sum of money as minimum investment.

To be an accredited investor means that one is expected to have some general investment knowledge, must be earning a given amount of net pay per year (this differs from country to country) and must also be able to have the minimum amount required to begin investing in the hedge fund.

Foreign exchange rates for hedge funds are set according to the financial strength of the company or individual in partnership with them.

Discussion Board

On the discussion board, we get to discuss numerous concepts in the world of Forex. Such concepts include Interbank Rate, Multi bank Portals, Stringent Regulations, and the Great Dot Com Industry and its effects on Forex.

1. Interbank Rate

An interbank is an institution that gives banks the liberty to lend money to other banks. Therefore, an interbank rate is the lending rate at which banks that lend money charge.

It can also mean the rate at which the money lent out is expected to be paid back. Banks can decide to lend money on the interbank in order to take care of liquidity.

The rates charged depend on the amount of money given and also on the length of time that the borrowing bank takes to give back the money borrowed.

Banks are always expected to have enough money in their accounts to cater for their clients’ needs like withdrawals and loans.

When a bank does not have enough money to cater for the needs of its clients, it is forced to borrow from the interbank. On the other hand, some banks have more liquid assets than their clients can consume.

In this case, they become the lenders in the interbank and receive interest on the assets they lend out according to the current rates that are often set by the interbank market.

2. Multi Bank Portals

A multi bank portal is a trading ground for two parties, often a corporate client and his or her bank(s). The idea of having a multi bank portal or multi bank trading was driven by the rising number of global corporate clients in a fast growing forex market.

Multi bank trading has helped reduce administration and operation costs by being visible and available at any time. It has also helped reduce banking time and improved the quality of information and data concerning the banking details.

There is also an effective management because corporate clients get to gain access to information regarding their cash anytime they need to.

Multi bank portals have a number of advantages that make people want to trade with them. They include:

• There is a provision of financial solutions that help in meeting the needs and preferences of the different corporate clients
• It provides a secure and legal communication platform where the corporate clients get to communicate with their banks and banks with their clients at any time the need to communicate arise.
• It uses up to date technology to ensure faster services thus saving time and resources.

3. Stringent Regulations

Regulations are everywhere we go and in everything we do, including trading.

It does not matter where in the world you are trading from, what matters is that there are rules and regulations that concern the trade and you have to adhere strictly to them in order to succeed.

Since foreign exchange is an over the counter kind of market, different countries have different regulations that need to be followed.

Knowing and following these rules and regulations to the core is mandatory for any trader to avoid penalties that are associated with breaking rules and regulations.

The major regulation that a forex investor must strictly follow no matter which part of the world he or she is trading from is to ensure he or she registers with a regulating body.

For instance, if you are in America, you need to register with the Commodity Futures Trading Commission and National Futures Market bodies before starting your trading career in the forex market.

Under the regulations, you also need to include your assets as a determinant for your capital or you can as well use those assets as a margin for your position in the market.

The control regulations also vary from country to country but the major one is that there is often a fixed exchange rate. This is done in order to control the currency within the borders of the given country.

Tax regulations also depend with individual countries. There are certain countries that allow traders to trade tax free; that is, they are not taxed on the profits they make from trading forex.

Some other countries are strict and have to tax the income from the forex market.

Advertisement

4. The Great Dot Com Industry

Dot com technically means technology savvy. Forex market is one of the largest markets in the world that is known to have taken advantage of technology and improved its clients’ base.

The biggest advantage of trading forex in these modern days is that it is automated.

Unlike the earlier times when forex market began, the whole trading experience was manual and you had to physically go to your brokers and find the best one for you.

With technology at our fingertips, all you need to do is log into the internet, and check out some of the best forex brokers and use their help.

One good thing about this technology is that you don’t have to be in the same country with your broker. As long as you agree on how you are going to do business, you are good to go.

The great dot com forex industry has also made it possible for beginner traders to learn much about the forex market before having to put in their hard-earned cash into the market.

This is because of the introduction of demo accounts whereby a new trader is taken through a guided step by step instruction of how to trade forex, what to do, how to do it, how to place stops, how to avoid losses, how to know when to place orders, and basically every little detail that a trader is expected to know about the forex market.

The good thing about demo trading is that it is often free and it offers you much more than you can expect.

The introduction of such technological tools has improved the look of the forex market and made it easier for people to trade faster and conveniently.

There has also been the availability of robot traders for those traders who happen to be quite busy and cannot sit beside their computers all the time to check on the currency charts and know when to place orders.

These robots are programmed according to the preferences of the human trader and they will actually work according to how they are programmed. Thus, a trader is often advised to be careful when programming the robot such that it does not interfere with his or her values or trade against his or her wishes.

In as much as the automated forex market is highly praised and appreciated, the traders must be careful to know which brokerage firm or which individual broker they can trust with their forex capital.

There are people out there to swindle your money and leave you cursing and depressed; therefore, you should be careful in selecting the brokerage firm that you can trust to take you through forex trading without regrets.

One thing about the dot com industry that might be saddening is the fact that most people like instant success.

People have ignored the value of patience and tend to miss out on important moments in the forex market like when to place and exit an order. Many are known to have over traded and lost a lot of money in a bid to gain much more.

Many people also put their emotions before logical thinking and forget that in any kind of business, forex included, there are moments you will win and other moments you will lose.

They tend to celebrate when they gain and get depressed when they happen to lose. They spend so much time regretting and cursing the foreign exchange market instead of taking their time to look deep into their mistakes, find where they went wrong and learn from those mistakes and avoid ever repeating them again.

Many successful forex traders are people who showed a cold heart especially when they incurred losses and did not get their eyes off the prize.

They remained level headed, focused, disciplined, and did not fail to follow the strategies that they laid down at the beginning of their trading career.

Every beginner trader is therefore advised to keep emotions at bay while trading and stick to the original goal of venturing into the trade: success.

Summary

Even though the forex exchange market worked strictly under central banks and governments in the early days, it has evolved with time to accommodate other institutions as well as individual investors.

The fact that the forex market is large has dwarfed the capabilities of other financial markets.

A lot of money is estimated to be traded in the currency market everyday; therefore, online currency trading still remains the most lucrative opportunity for the modern day smart investor.

Photo credit: CubaGallery