Currency trading is one of the basics which many people interested in learning about Forex are a little embarrassed to ask about. Although it is a key element of trading, many people have never had the concept of currency trading fully explained to them, so find it hard to put into some real world context.
The most significant historical event in the Forex market place was when the gold standard was established in 1875. This was a way for countries all over the world to standardize the value of their local currency by referencing it to an ounce of gold.
This was the standardized measurement for many years, but it was impacted heavily by both World War One and Two. The main reason for this was that the governments of the countries involved financed the wars with printed money that was in excess of gold reserves. Many countries re-established the gold standard between the wars, but after it was removed during World War Two it failed to be reinstated after peace was declared.
The main reason for this was that in 1944 the Bretton Woods System was established. This allowed the US Dollar to replace the gold standard and allow a truer rate of exchange between various local currencies. This system established a collection of rules and procedures to regulate the monetary system throughout the world. It was debated by over seven hundred delegates from the forty four Allied nations in preparation for rebuilding the international economy.
The Bretton Woods planners established two key organizations which are still part of the World Bank today. The IMF and the IBRD became fully operational in 1945. Each participating country was obliged to adopt a formal monetary policy which tied local currencies to the US Dollar to produce an exchange rate and allowed the IMF to bridge temporary fluctuations and imbalances. This allowed the practice of currency trading since the rate for buying and selling local currencies were set at different rates. Of course the foreign currency market has evolved over the years, but even a little basic historical knowledge can help put Forex concepts and trading into perspective.