Foreign exchange trading (FOREX) has a long and storied history, dating back to the late 19th century. Due to the fluctuating nature of currencies around the world, a system was necessary to make the buying or selling of one currency for another equitable and simple to calculate.
You may be wondering: why was the system necessary, and how did it benefit the global economy?
By having a standardized system in place, foreign countries were guaranteed a specific amount of gold in exchange for a specific amount of their currency, which was used to purchase goods from other countries.
This made trading with and importing from foreign nations easier as each country could translate the cost of something in the original currency to their own. This not only eased tensions when it came to trading with foreign countries but made it much simpler, allowing them to grow their own economy with ease.
It's even more important than any of that.
Before you slam your phone down in a forex-based confusion rage, take a deep breath. You may ask “what is forex?” now, but in a few minutes, you're not just going to know what it is, you'll know where it came from, why it happens, why it matters, and even how it affects your life.
Buckle up, folks. You're in forex ride of your life.
What Is Forex, Exactly?
Easy, huh? Okay. Picture a stock market. That's the world in which forex lives.
Forex is simply the full name for the foreign stock exchange. (Though, to be fair, it's not really all about stocks.) It's also known as the FX market, just FYI. Forex is the most traded market in the world, with over $5.1 trillion dollars traded every single day.
Even if that's all you know about forex, that should be enough to clue you in. It's a big deal. A $5.1 trillion big deal. The US stock market, which is in and of itself a pretty big deal, trades upwards of $257 billion dollars a day. That means the US stock exchange is trading less than 20% of the money that is moving through forex daily.
Pretty wild. But wait, there's more.Because forex is the foreign stock exchange, bringing in money from all over the globe, it's open and running 24 hours a day.
Forex is the unstoppable Energizer bunny of money trading. Individuals, institutions, and banks can pretty much trade whenever, wherever they want on forex as there are no opening and closing hours and no centralized physical market location.
And It Works How?
Not necessarily. Forex trading involves consecutive buying and selling of world currencies. It's a little different than straight-up stock exchange work because instead of buying and selling your stocks or shares in a company, you're focusing on currency.
Forex trading is all about buying money.It's less complicated than you might think. And actually, you've probably done it before.
Imagine you're traveling to another country. You're on your way somewhere awesome: you have your passport, your money belt, your Fodor's guidebook, and an international SIM card. You're ready to go.
But as soon as the plane's wheels touch the runway, a spike of fear runs through your heart. You didn't exchange any money. All you have in your wallet are boring old hometown bucks, and those won't get you anywhere where you're going. How are you going to buy those beachfront margaritas with no cash?
You leap off the plane, race through the terminal, and get in line and your friendly airport currency exchange counter. You hand over a sweaty wad of cash, sign your name to a receipt, and voila! The helpful albeit tired face behind the plexiglass hands you a fresh stack of beautiful local currency.
That's forex. You traded your perfectly good money for other perfectly good money.
Now, if you were a legit forex trader and were trying to, say, make some money off of your money, you would study that chart posted next to the currency exchange window to see if you could trade back your newly purchased money for money that you suspect will increase in value. After it increases, as it hopefully will, you could trade it back for more money than you started with. As it stands, you saunter out of the airport headed for beaches and bonbons.
Naturally, if you're trading on a professional level, it's quite a bit more complicated than that, but you get the gist. And now, not only do you know “what is forex,” you can probably call yourself a forex trader! Check you out.
Back Where It All Began
It all started way back in 1875. Year of the first Kentucky Derby, the beginnings of the phone with Alexander Graham Bell's first voice transmission, and the first newspaper cartoon strip.
It was also the beginning of gold's role as a global currency.
Well, not quite like that. Gold had obviously been around a lot longer than the nineteenth century, but before 1875, it was just used as itself— its own currency with its own worth. If you wanted to get on a plane and jet-set around the world (okay, so not in a plane in 1875), you'd have to lug gold and silver around with you to pay for your food and lodging and busboys.
And even that sounds okay until you start to think about gold as a physical thing. It's heavy, sure, but it's also prone to fluctuations based on global supply and demand. If your home city was gold-poor, it might be pretty difficult to get the gold you needed to travel, no matter what value gold was sitting at in your chosen vacation destination.
This major gold-as-global-currency milestone made forex what it is— actually, it made forex. With the gold standard monetary system, each individual country developed a conversion rate that would allow people to exchange gold for that particular currency. The price difference between gold and one currency and the price difference between gold and another currency the creates the exchange rate between the currencies themselves.
And thus exchange rates (and forex) were born. Airports have been building new currency exchange booths ever since.
Dusty Old Gold
“Ouch,” said forex. What makes forex is that it doesn't work if you can't effectively trade currencies, and with no gold standard... things got rough.
Great Britain was the first country to get rid of the gold standard in 1931. The US followed two years later in 1933. The idea was that the ability to print more money and get the money in the hands of the people would stimulate the economy and get the world back on track, economically speaking.
It sort of worked, eventually, but it took a minute.
Well, exchange “minute” for “about fifteen years.” And add a bunch of other not-so-great factors, like a major world war. But that's another story.
In terms of gold and currency exchange and forex, though, the story gets a little lighter. The Bretton Woods Agreement of 1944 made forex possible again.
People from 44 different countries met at the United Nations Monetary and Financial Conference in Bretton Woods, New Hampshire (hence the name) to bang out a deal that would bring back the gold standard. Stay tuned for how this one ends.
But for the moment, the Bretton Woods thing was a pretty good deal. It established a system through which the price of currency would be tied to the price of gold, all based on the US dollar. The dollar would be set at a permanent price of $35 per ounce of gold, and all other currencies would determine their value off of that.
And, although all that was to change pretty quickly, there were a couple of big takeaways from Bretton Woods. Two major international organizations and one international agreement were created in addition to the Bretton Woods Agreement itself to deal with current and future economic activity and issues.
The IMF is an international organization with representatives from 189 different countries. Its focuses include building global monetary cooperation, securing financial stability for countries in need, facilitating international trade, promoting high employment and economic growth, and reducing world poverty.
International Bank for Reconstruction and Development
This international organization provides loans to middle-income developing countries. It is also cooperatively owned and operated by 189 countries, and it is one of the first five member institutions of the World Bank Group.
General Agreement on Trade and Tariffs
This treaty, signed by 23 countries in October 1947, was an agreement that was meant to open up trade throughout the world. It reduced tariff duties between signatory countries and has continued to play a major role in world trade ever since. It was replaced by the World Trade Organization (WTO) in 1995 and played a key role in helping over 90% of the world's international trade run smoothly and flawlessly.
The US supply of gold could no longer cover the number of dollars that were in circulation, so it was no longer possible to tie the two together to create an exchange rate. Because the US dollar was the bedrock of the Agreement, things had to change.
After 1973 (the official end of the Bretton Woods Agreement), countries were free to choose their own way to determine the exchange rates of their currency. Some countries decided to tie their currency and exchange rate to that of another country while others let market value determine their exchange rate.
The UK made the floating decision (to let the market determine currency value) in 1973, and shortly after, many European countries followed suit.
The Modern World
And no, it wasn't another Great Depression or another Nixon presidency.
It was the internet.1994 saw the invention and beginning of online forex trading, and it hasn't stopped since.
With online trading, the number of people who wanted to get in the game jumped up dramatically. People could now literally trade anywhere and everywhere, and many people did.
In conjunction with the invention and popularity of the internet, the Euro was introduced and adopted by 12 initial European countries in 2002. But not to worry, there are still enough currencies around the world to make forex worth knowing and maybe even worth doing.
The Modern World
Next time you're in line to get some vacation bucks, take a minute to look at that currency exchange rate chart. Then smile to yourself, because while you know what forex is, you also know you don't have to spend your life immersed in it.
Unless, of course, you want to.