Did Forex trading begin with the big bang 13.8 billion years ago? Or did it begin 4.5 billion years ago when the Earth’s new tectonic plates started trading currencies with each other?
You may be unsurprised to hear that Forex trading is not that old, but it is still thousands of years old with a rich history. And like any human endeavour stretching back millennia, the forces of global events, politics and technology adapted how people conducted Forex trading.
Let’s chronicle the history of Forex trading from the times of kingdoms and rulers to today’s modern democracies with central banks and technology letting everyone access the largest market in the world, Forex.
Top Forex Brokers
The History of Currency Trading and the Forex Market
The history of Forex trading is also a history of the emergence of economic systems, the first physical coins, and civilizations that rose and fell.
I will split the history of Forex trading into key periods: ancient times, medieval, early modern, and modern times. Go to the part that you find the most interesting!
Ancient Times
Bartering and the birth of coins
Mesopotamia tribes (located in modern-day Iraq) introduced the first method of exchange, known as the barter system, in 6000 BC. They used the system to exchange goods via ship, and as the system evolved, salt and spices emerged as the most popular methods of exchange.
Bartering spread to the Babylonians (also in modern-day Iraq) and the Phoenicians in the eastern Mediterranean, and the system continued spreading across different civilizations. After thousands of years of use, the bartering system saw its most significant change with the adoption of gold coins in the 6th century BC.
Gold and other metals became a medium of exchange because they are durable, uniform (a gram of gold is the same as another gram of gold), and divisible. These features made it highly acceptable to different populations.
However, metal-based currencies became challenging to use in international trade because there was no standardized method to determine their value. One way to solve this problem was to use coins produced by a single trusted issuer. The first coin widely accepted for international trade was the Aegina “Sea Turtle” coin, a Greek silver coin minted in Aegina, an island off the coast of Greece. Today, you can buy these coins on eBay!
Ancient Egypt
One of the first pieces of evidence of currency trading is from a papyrus strip dated between 259 BC to 8 BC showing occurrences of coinage exchange in Ancient Egypt. We know from evidence such as this that Greeks and Egyptians traded goods and currencies with silver and gold coins.
4th Century Roman Empire
In the fourth century AD, money changers used city stalls in the Holy Land and helped people change money for a fee—today, we call these people ‘brokers.’ During this time, the Byzantine government (the eastern part of the Roman Empire) controlled most of the currency market and, in effect, maintained a currency exchange monopoly.
Medieval and Later Times
13th to 18th Century Europe
In the 13th century, the Republic of Florence (today, part of Italy) emerged as a major European and Mediterranean power. From 1252 to 1533, Florence minted gold and silver coins, and the gold coin, known as the “Fiorino d’Oro” or “Florin,” had a fixed gold content.
When other European nations followed Florence by minting their own gold coins, the quantities of gold in their coins varied. As a result, the Florin quickly became the standard currency for international trade in Europe and was used as a benchmark to measure the international value of other coins. Many historians consider this an early form of the gold standard.
In the 15th century, the Medici family, from the Republic of Florence, founded the Medici Bank, which became the largest bank in Europe during the 15th century. The family became the wealthiest in Europe and was a political dynasty that even produced four Popes. As part of their business enterprises, they needed to open banks in foreign locations to exchange currencies for acting on behalf of textile merchants. To facilitate trade, the Medici Bank created the “nostro” account book, which contained two columned entries showing amounts of foreign and local currencies, thus furthering Forex trading.
17th century—the first Forex market
As currency usage and the European economy grew, in the 17th century, Amsterdam established the first Forex market. It exchanged currencies between Holland and England.
Around this time, Monte dei Paschi, the world’s oldest bank in Tuscany, Italy, standardized its operations in 1624 to facilitate currency transactions.
Modern & Post-Modern Periods
The first investment bank in the US, Alex Brown & Sons, traded foreign currencies around 1850 and became a leading currency trader in the USA.
The early twentieth century
The beginning of the 20th century saw a large increase in countries’ foreign exchange holdings. From 1899 to 1913, countries’ foreign exchange holdings increased annually at a rate of 10.8%. When compounded, this effectively quadrupled countries’ foreign currency reserves.
London as the centre of Forex
At the start of the 20th century, currency trading was most active in Paris, New York, and Berlin. But by 1913, nearly half of the world’s foreign exchange was conducted using the British pound sterling, and London saw a rapid increase in foreign exchange brokers from only two in 1902 to 40 by 1924.
During the 1920s, the Kleinwort family were known as the leaders of the foreign exchange market. They had expanded its foreign exchange department to take advantage of the enormous increase in Forex trading resulting from the introduction of currencies in the new central European states as well as the traditional currencies such as US Dollar. Other FX trading leaders at the time included Japheth, Montagu & Co. and the Seligmans.
By 1928, the Forex trade was integral to the financial functioning of the City of London.
The Gold Standard
As physical metal coins became bulky and impractical, they gave way to paper money (the first paper was invented in China before 900 AD; the first banknote in Europe was in 1661 in Sweden and 1690 for the US).
Countries began using ‘gold standards’ to ensure the value of their currencies. A gold standard ensures that a government will redeem any amount of paper money for its value in gold.
In other words, a country could only issue as much national currency as it held in gold reserves.
Britain officially adopted a gold standard in 1816 (but had operated a de facto gold standard before that). The US established its gold standard in 1880, and western European countries and Russia did so in 1897.
Most nations eventually abandoned the gold standard because of the inability to print money to finance wars and other economic pressures.
After World War II
The first few decades of the twentieth century saw economic and political strife in the US and other parts of the world, with the US Great Depression and two world wars. In 1944, at the end of World War 2, the US, Canada, several Western European countries, Australia, and Japan signed the Bretton Woods Accord to forge economic relations. The agreement allowed their currencies to fluctuate between ±1% from the currency's par exchange rate. The Bretton Woods agreement also resulted in the creation of the International Monetary Fund (IMF) and the World Bank.
In Japan, the Foreign Exchange Bank Law was introduced in 1954, which helped make Tokyo a foreign exchange center.
The beginning of free-floating exchange rates: U.S. President Richard Nixon ended the Bretton Woods Accord, thereby helping to end fixed rates of exchange. This began the process toward a free-floating currency system. In developed nations, state control of foreign exchange trading ended in 1973, thus beginning the free-floating and relatively free market conditions of modern times.
The beginning of computerization:Technology made an early impact when Reuters introduced computer monitors in 1973, replacing the previous telephones and telex machines used for trading quotes.
1991: George Soros and the British Pound
In 1979, European countries set up an Exchange Rate Mechanism (ERM) that required member nations to keep their currencies within a specified exchange rate value. Britain joined this mechanism in October 1990. However, the British Government struggled to keep their currency within the agreed range and had to raise interest rates to 15% at one point to support the British Pound’s value. Eventually, keeping the British Pound within the ERM became unsustainable, and in 1992, the Pound’s value collapsed. Currency speculators, most famously George Soros, profited in the billions from selling the GBP. Soros’ trade against the British pound has been called one of the greatest currency trades of all time. There has been much debate about whether speculators such as Soros helped bring about the currency’s devaluation or merely profited from an inevitable collapse. The event was also notable because it was the first time many people had heard of the idea of speculating in currencies.
The birth of the Euro
After a decade of preparation, on January 1, 1999, the Euro began with 12 European countries. Coins and banknotes were launched on 1 January 2002, and the biggest cash changeover in history took place from 12 former currencies. Today, the EUR/USD currency pair is the most liquid and widely traded of all currency pairs.
The Birth of Retail Forex
1990s
The first retail Forex platforms arrived during the late 1990s, which was made possible by the birth of the internet. Today, retail Forex trading accounts for about 5% of the whole Foreign Exchange market.
Regulation in the 2000s
Initially, retail Forex was virtually unregulated. As you can imagine, this led to many unscrupulous practices from certain brokers, such as manipulating prices and outright theft of clients’ deposits. This was unsustainable, and governments began regulating Forex. Even though some aspects of Forex regulations were controversial, the regulations made Forex a much safer market to trade. However, many traders disagreed with regulators’ decisions to limit leverage. Overall, though, regulatory bodies helped the Forex industry to grow-up, and I consider this the birth of modern retail Forex.
US regulations
On September 10, 2010, the CFTC published the final regulations concerning off-exchange retail foreign currency transactions. Part of these regulations placed limits on leverage, the most controversial aspect of Forex regulations.
European leverage caps
In 2018, the European Securities and Markets Agency (ESMA) capped the leverage brokers can offer retail investors.
Reduced spreads
Since retail Forex appeared, spreads have drastically reduced. In the early 2000s, EUR/USD and GBP/USD spreads were typically between 3 to 5 pips. Today, those pairs can have spreads of less than 1 pip.
Top Forex Brokers
Key Events Which Have Shaped the Forex Market
- 6000 BC—The creation of the barter system by Mesopotamia tribes in modern-day Iraq
- 6th Century BC—The adoption of gold coins.
- 6th Century BC—The creation of the Aegina “Sea Turtle” coin, the first coin to be widely accepted for international trade.
- 1st-2nd Century BC—Evidence of coinage exchange between Greeks and Romans.
- 4th Century AD—Money changers, i.e., brokers, in the Holy Land helped people change currencies.
- 13th Century AD—Florence minted the “Florin” coin with a fixed gold content, an early gold standard.
- 17th century—The world’s first Forex market appeared in Amsterdam.
- 1944—The Bretton Woods Accord placed limits on currency value fluctuations.
- 1973—The beginning of free-floating exchange rates when U.S. President, Richard Nixon, ended the Bretton Woods Accord.
- 1991—The collapse of the British Pound exiting it from the European Exchange Rate Mechanism. The speculator George Soros famously profited from this currency devaluation.
- 1996 (approx.)—The internet made retail Forex possible.
- The 2000s—US, European and other nations started regulating Forex.
- 1999-2002—12 European countries converted their currencies to the Euro.
Forex Trading Today and in the Future
Forex Today
Forex trading today has grown from scrappy beginnings with almost no regulations to an international industry with multiple regulatory bodies around the world, established brokers, 24-hour access and traders that have built fortunes through Forex. One of the most controversial elements of Forex regulations is the limits on leverage. However, because many regulators now insist on safeguards such as the segregation of client funds, losing your deposit is almost impossible if a broker goes out of business - although it may take some time to retrieve the funds.
Trading costs: Spreads have decreased by approximately 90% since retail Forex appeared in the late 1990s. The minimum deposits required by brokers have also been significantly reduced.
Methods of deposit have expanded to PayPal and credit cards, where brokers before only accepted wire transfers. Today, Forex is more accessible than ever before.
Forex in the Future
Social trading, where traders can interact with others through their brokers’ platforms, is set to increase. Forex education is constantly improving—well-reviewed educators and signal providers are becoming more prominent.
New traders can find information on technical analysis and news events that affect the market better than ever before.
Access to more markets: Brokers are constantly expanding the markets available to clients. Today, there are almost no Forex-only brokers. Most brokers give access to multiple asset classes, such as stocks, commodities, and crypto. That means I can automatically trade multiple other markets once I have a Forex account.
Forex today is by far the largest market in the world, with over $7 trillion traded daily, and this will likely continue.
Conclusion
The history of Forex trading is intertwined with the history of commerce and trade.
The first economic activity began through bartering in 6000 BC in modern-day Iraq by Mesopotamian tribes. The first evidence of Forex trading is back in the 1st-2nd centuries BC, where we have evidence that Greeks and Egyptians traded currencies with silver and gold coins. Through centuries of development and innovation, Forex trading grew as economies grew alongside international trade.
Previous decades and centuries saw attempts by governments to control the value of their currencies through mechanisms such as the gold standard or the European Exchange Rate Mechanism. But those measures proved costly and damaging to economies, so most nations moved to free-floating exchange rates.
Retail Forex became possible through the internet. After a messy start, regulators stepped in to protect the public from dishonest practices by brokers. And over the years, competition created better trading platforms and lower costs. Thousands of years of the history of Forex trading has produced an excellent market for today’s traders.
