Forex is one of the largest, oldest and most liquid of financial markets to trade in, and part of the appeal of an instant funding prop firm is that anyone with the skills or discipline can get the capital they need to take full advantage.
That history is itself somewhat fascinating given that forex is such a fast-paced and constantly changing market that it feels far newer than it actually is.
For as long as there has been a concept of money as a store of value, there has been a foreign exchange market, but the beginning and evolution of forex is a tale of three acts based around three fundamental concepts and transitory periods.
Medium, Measure, Standard, Store
Money has existed for as long as there have been distinct civilisations and thus the need to trade goods and services beyond the confines of even a broad definition of barter (which incorporates gifts and debt).
A barter system only works if two people have exactly what other people want, so in order to send something to one person and receive something from another without either trade simply being gifts, a system of currency was established.
Most currencies work on a set of four (later three) functions described by William Stanley Jevons:
- Medium of exchange
- Common measure of value (or unit of account)
- Standard of value (or deferred payment)
- Store of value
Standard of value is assumed to be part of the other three functions of money, but every type of money attempts to fulfil these functions in one form or another, and this has been true for as long as there have been communities larger than small hunter-gatherer communes.
The foreign exchange market began with money changers, who existed to ensure people who travelled from one country or region to another could convert money in exchange for a fee or commission.
This was made possible because nearly every civilisation of this period used silver as their standard currency, beginning with the Mesopotamian shekel, which was widely used throughout the ancient world.
In practice, this was closer to a bureau de change than the forex trading market traders would engage with, but every early civilisation with a standard currency had a money-changing industry and this would continue to be the case until the 19th century and a paradigm shift took place that enabled the start of the modern forex industry.
The Gold Standard
There were existing forex markets before the establishment of the gold standard, but they tended to rely on the physical value of the precious metals used to mint the coins themselves.
As trade became more international, this became more complex and impractical, particularly when trading currencies internationally; shipping huge amounts of silver coins was difficult and potentially dangerous in an age of pirates.
The solution to this, first established in Britain in 1821 and in most of the economic world by 1880, was the gold standard, an economic unit that allowed a currency to be freely exchanged for a fixed amount of gold. This was made possible thanks to the gold rush which greatly expanded the amount of gold available for economic purposes.
The international monetary system relied on the gold standard, and this allowed for the creation of forex as we know it, with early traders such as Alex. Brown & Sons and J.M. do Espirito Santo de Silva (later Banco Espirito Santo) beginning operations as a result.
The gold standard continued until the First World War, which led to the adoption of exchange controls which broke the fundamental principle of convertibility.
Whilst attempts were made to restore the system following the Treaty of Versailles, the system died completely with the Great Depression. The depletion of resources and gold supplies following the war meant that many countries directly involved struggled to return to it until the late 1920s.
The Rise And Fall of Bretton Woods
In 1944, with the end of the Second World War close at hand and a desire to rebuild the international economy ravaged by conflict and chaos, the Bretton Woods system aimed to restore the principles of the gold standard but without the inflexibility that led to its suspension.
It essentially used the United States dollar as a central medium of exchange, which could itself be converted to gold at a rate of $35 per troy ounce. In exchange for this reliability, currency rates were fixed to within one per cent. This agreement also led to the creation of the International Monetary Fund (IMF).
However, this system also proved inflexible, having placed the dollar in a position where it could not guarantee its fixed-price convertibility into gold.
On 15th August 1971, then-President Richard Nixon announced that the dollar would no longer be convertible into gold, ending the gold standard and establishing the modern foreign exchange market as we know it today by 1973.
By 1982, currency pairs were available to be bought and sold.