When you are trading currencies in the Forex market, it is important to have an understanding of how everything began. Currency trading has its roots in the 1940s. During this time, the Bretton-Woods agreement was passed. The international currencies were becoming increasingly unstable due to World War II, and world leaders wanted to bring stability to the markets. This agreement was the first attempt by world governments to establish guidelines and regulations for national currencies around the world.
The Bretton-Woods agreement tried to regulate currencies from fluctuating too much from regulated levels. The agreement provided for fixed exchange rates between currencies. It was designed to stabilize the international markets to promote free trade among the nations of the world.
Prior to the Bretton Woods agreement, the world’s major economies were backed by gold. As part of the agreement in 1944, a reserve currency was established to help countries maintain a fixed exchange rate that never changed more than 1%. The United States dollar was chosen as the reserve currency, and the United States agreed to make the dollar worth $35 per ounce of gold. Essentially, the world currencies were backed by the US dollar.
While the agreement worked well for a time, this agreement also had flaws. The financial power of the world shifted to the United States after World War II, but European countries needed money to rebuild infrastructure destroyed during the war. The United States started providing grants to many of the European countries as it became the most powerful county in the world.
The United States finally decided to stop backing the dollar with gold in 1971. People could no longer exchange dollars for gold. Supply and demand now fueled the world currencies, and the Forex market really began to take off.
Emerging technology in the 1980s further propelled the Forex market as it made it easier for currencies to exchange hands. This has fueled the current explosion of trading in the Forex markets, and trading continues to increase every year.