Introductin : -

Forex Market is the largest financial market in the world in terms of liquidity, where currencies from different countries are traded. Trillions of dollars are pumped into this market daily. Therefore, let's take a look in this article at how the Forex market was created and developed to become what it is today.

The article will cover the following points : -

1: Trading under the barter system

2: Gold currencies

3: The Bretton Woods Agreement

4: The collapse of the Bretton Woods Agreement

5: The Plaza Accord

6: The interbank system

7: The forex market today

1: Trading under the barter system : -

The barter system is one of the oldest methods of trade, dating back to around 6000 BC. It is often considered the foundation that paved the way for the later emergence of foreign exchange trading. In this system, goods were exchanged for other goods. Over time, the process evolved to include items such as salt, spices, fruits, and others, which were in high demand and widely used as means of exchange. However, in the 6th century BC, gold coins began to emerge. From here, gold coins became the preferred choice for currency due to their ease of transport, divisibility, standardized value, and limited supply—key characteristics of modern-day money. Thus, the gold coin system gradually replaced the barter system.

A simple example about barter system:

In the past, if you wanted to buy a kilogram of oranges, you would go to the seller. However, they would not give you the oranges unless you exchanged something else with them, such as half a kilogram of wheat. In other words, a kilogram of oranges was equivalent to half a kilogram of wheat. This is simply the concept of "barter," where goods are exchanged directly without the need for money.

2: Gold currencies : -

In the late 18th century, most countries adopted the gold standard, which ensured that governments could exchange paper money for gold at the same value. This system remained effective until the outbreak of World War I, when European countries were forced to suspend the gold standard to cover the costs of the war by increasing the issuance of paper money. At that point, it became necessary for each country to develop its own paper currency as a means of exchange, leading to the phenomenon of printing paper money in every country.

A simple example about gold currencies:

Suppose you have 100 dollars and want to exchange them for gold. In the past, the government was the guarantor of this transaction, allowing you to convert money into gold based on its value. However, with the onset of World War I, large amounts of paper money were printed, far exceeding the available gold supply. As a result, the government stopped accepting the exchange of paper money for gold.

3: The Bretton Woods Agreement : -

The Bretton Woods Agreement was an international agreement aimed at reorganizing the global financial system after World War II. This agreement was signed in July 1944 in Bretton Woods, New Hampshire, USA. The agreement aimed to unify currency stability by creating a system of fixed exchange rates, where currencies were pegged to the U.S. dollar, which in turn was linked to gold. The goal was to promote financial cooperation between countries.

The Bretton Woods Agreement established several international institutions, such as the International Monetary Fund (IMF), which aims to provide loans and ensure the stability of exchange rates, and the International Bank for Reconstruction and Development (IBRD), which was established to rebuild war-torn countries and finance development projects.

4: The collapse of the Bretton Woods Agreement : -

In 1971, the Bretton Woods Agreement faced its first real test due to fluctuations in the exchange rate of the U.S. dollar, which resulted from the United States' financing of the Vietnam War. This financing led to a loss of confidence in the U.S. dollar, contributing to the collapse of the system.

As a result, many countries moved toward a floating exchange rate system, where the exchange rate is allowed to fluctuate based on supply and demand. In this system, central banks retain the right to intervene to control the exchange rate if necessary. This shift led to the emergence of a market primarily driven by supply and demand forces, where buying and selling decisions are influenced by the economic forces of nations.

5: The Plaza Accord : -

By the early 1980s, the strength of the U.S. dollar had increased the debt burdens on developing countries, and many European factories closed due to their inability to compete with foreign production. As a result, the five major powers— the United States, the United Kingdom, France, West Germany, and Japan— met in 1985, sending their representatives to a secret meeting at the Plaza Hotel in New York. News of the meeting leaked, prompting the major countries to issue a statement calling for the strengthening of non-dollar currencies such as the euro, yen, and British pound. This meeting thus became known as the Plaza Accord.

6: The interbank system : -

The "interbank" system is a network that connects the largest banks and financial institutions in the world, as these banks are considered the key players in the foreign exchange market due to the vast liquidity they hold. This system was developed to facilitate the process of finding buyers and sellers, making exchanges between banks easier. Each bank is expected to provide its own bid and ask prices. The system includes around 2,000 banks and financial institutions worldwide, and these banks control a significant portion of the total trading volume in the foreign exchange market, accounting for more than 34% of the total market trading volume.

7: The forex market today : -

With the advent of the internet, forex trading spread rapidly around the world. Banks helped unify the forex market by providing the necessary liquidity for currency exchange. As things progressed, the need for digital financial intermediaries emerged, allowing individuals to connect to the forex market without the need to go through banks. Today, brokers fill this gap, enabling investors to easily open trading accounts via their smartphones and freely participate in the market.

Conclusion : -

The forex market has seen significant evolution over the decades, from the gold-based system to the Bretton Woods Agreement, along with the changes resulting from agreements such as the Plaza Accord and the barter system. These changes are part of the broader evolution of the global economy and the liberalization of financial markets.