A practical history of the forex market
Today's 24-hour electronic market was not designed in one step. It emerged from changing monetary systems, capital controls, floating rates and networked dealing.
Money was anchored before it floated.
For long periods, major currencies were tied directly or indirectly to gold. Exchange rates could still move, but the monetary system constrained how far and how freely governments could adjust them.
War, depression and repeated pressure on reserves exposed the tensions between fixed convertibility, domestic policy and international payments.
A managed post-war system
In 1944, delegates designed a system of fixed but adjustable exchange rates. Currencies were linked to the US dollar, and the dollar was convertible into gold for official holders. The IMF and World Bank emerged from the same conference.
The system supported reconstruction and trade, but depended on confidence in the dollar and the United States' ability to maintain gold convertibility.
Major currencies begin to float
In 1971 the United States suspended dollar convertibility into gold. Attempts to preserve fixed parities did not last, and by 1973 major currencies were largely floating against one another.
That change made relative inflation, interest rates, growth expectations, policy credibility and capital flows more visible in exchange-rate movements.
From voice brokers to screens
Foreign exchange remained an institutional market led by banks, corporations, investors and central banks. Electronic interbank systems, faster networks and algorithmic execution gradually replaced much telephone dealing.
Retail access expanded much later through online margin brokers. That access did not turn spot FX into a central exchange: prices and volume still depend on counterparties, venues and data feeds.
A pair is a relative policy price.
Currencies are not isolated assets. EUR/USD, for example, reflects the changing relative value of two monetary areas. A strong domestic data release can still weaken a currency if expectations had been even stronger.
History is therefore practical: it explains why central banks, rates, liquidity and policy regimes belong beside charts and execution costs.