The currency or foreign exchange market has evolved gradually to become the largest capital market in the world where major currencies are actively traded in a system of floating exchange rates.

The modern history of the forex market begins to take shape in the late 1800s as described in the following sections.

The Gold Standard

Before the advent of the Gold Standard in 1875, most countries would use physical gold or silver for the payment of goods and debts. Nevertheless, by linking their currencies to the value of gold as a standard, nations found they could use printed paper currency backed by gold in reserve for the payment of debts.

Since the printed currency of different nations related to the price of gold, the currencies also related to each other. Furthermore, as different amounts of each currency were needed for the purchase of one ounce of gold, this created a rate of exchange among the currencies.

By the beginning of the 20^th century, all of the major industrial powers had converted to the gold standard with a set amount of gold backing a specified amount of currency.

The gold standard gave stability to the world economy, enabled the industrial revolution and began a new era of international trade among nations.

Disruptions in the Gold Standard

The breakout of the First World War brought an end, at least temporarily, to the gold standard.

The enormous amount of capital needed to fund military defense projects against the German aggressors was far beyond the amount of gold available to back all of the currency.

As nations began ignoring the gold standard and no longer defined the values of their currencies in terms of gold, mass speculation in the currency markets soon followed.

By the end of the 1930s, Germany had revived its arms industry and was ready to embroil the world in a Second World War. The British Pound Sterling also lost considerable value when the Germans hatched a counterfeiting campaign which adversely affected the once powerful U.K. currency.

Because of the fundamentally poor state of the European and Japanese economies after WWII, the U.S. Dollar came to the forefront of the world economic stage to become the world's premiere reserve currency.

The Bretton Woods Accord

Before the end of World War II, the United Nations' Monetary and Financial Conference was held in Bretton Woods, New Hampshire in 1944. The meeting brought together delegates from all of the Allied nations who then worked out and signed the Bretton Woods Accord.

The Accord effectively pegged the price of gold to $35 U.S. Dollars per ounce and all other currencies to the U.S. Dollar with a maximum deviation of 1%.

The Bretton Woods Accord also established the International Monetary Fund and the Bank for Reconstruction and Development that are currently part of the World Bank.

Exchange Rates Start to Float

In 1971, then U.S. President Richard Nixon unilaterally suspended the U.S. Dollar's convertibility to gold, thereby leading to the demise of the Bretton Woods fixed system of currency convertibility.

Bretton Woods was replaced with a system of floating exchange rates that prevails to the modern era for the currencies of most developed countries.

Risk Statement: Trading Foreign Exchange on margin carries a high level of risk and may not be suitable for all investors. The possibility exists that you could lose more than your initial deposit. The high degree of leverage can work against you as well as for you.