Forex History

Today's forex market, where prices float freely 24 hours a day, is only about 50 years old. Knowing how we got here helps you understand why central banks matter so much and why currencies can sometimes move violently.

The Gold Standard

Under the gold standard, a country promised to swap its paper money for a fixed amount of gold. Britain led the way in the 1800s, and by the 1870s most big economies had joined.

If every currency is fixed to gold, every currency is also fixed to each other. Exchange rates barely moved, so there was little to trade.

7.32 ÷ 1.50 ≈ 4.88
So £1 ≈ $4.88 (the exact official rate was about $4.87),
and it hardly changed for decades.

Bretton Woods (1944)

In July 1944, delegates from 44 Allied nations met at Bretton Woods, New Hampshire, to rebuild the world's money system after the war. They agreed that:

• The US dollar was fixed to gold at $35 per ounce, and foreign governments could swap dollars for gold.
• Other currencies were pegged to the dollar, allowed to move only about 1% either side.
• Two new institutions were created: the International Monetary Fund (IMF) and the World Bank.

This made the US dollar the center of world finance, a role it still holds. It is on one side of about 88% of all forex trades.

Nixon Ends Gold Convertibility (1971)

By the late 1960s, the US was spending heavily and there were far more dollars abroad than gold in US vaults. Other countries began asking for their gold.

On 15 August 1971, President Richard Nixon "closed the gold window": the US stopped swapping dollars for gold. After a short-lived patch (the Smithsonian Agreement of December 1971), major currencies were left to float from 1973.

Floating rates are the reason the modern forex market exists. Once prices could move, there was risk to hedge and profit to chase.

The Plaza Accord (1985)

In the early 1980s, high US interest rates pushed the dollar up very strongly. American exporters struggled. In September 1985, the G5 (the US, Japan, West Germany, France and the UK) met at the Plaza Hotel in New York and agreed to push the dollar down together.

It worked. Over the next two years the dollar fell sharply, especially against the Japanese yen and the German mark. The Louvre Accord of 1987 then tried to stop the fall.

Black Wednesday (1992)

In 1990 the UK joined the European Exchange Rate Mechanism (ERM), which kept the pound within a band against the German mark. But the pound was widely seen as too high, and UK interest rates were hurting the economy.

Speculators, most famously George Soros's Quantum Fund, sold billions of pounds. On 16 September 1992 the Bank of England raised rates and spent reserves to defend the pound, but failed. That evening the UK left the ERM and the pound dropped. Soros's fund is reported to have made about $1 billion.

The Euro Arrives (1999)

On 1 January 1999, 11 European countries replaced their currencies with the euro for electronic and financial use. Notes and coins followed in 2002. The euro started at about 1.17 US dollars, fell to around 0.82 in 2000, and quickly became the second most traded currency in the world.

EUR/USD is now the single most traded currency pair.

Retail Online Trading

Until the late 1990s, forex was mainly a market for banks and big institutions. The internet changed that:

• Late 1990s–2000s: online brokers let individuals open small accounts and trade from home.
• 2005: MetaTrader 4 was released and became the standard retail platform for years.
• 2010: the US CFTC capped retail leverage at 1:50 on major pairs.
• 2018: the EU regulator ESMA capped retail leverage at 1:30 on majors and required negative balance protection. The UK FCA and Australia's ASIC (2021) adopted similar rules.

The SNB Franc Shock (2015)

From 2011, the Swiss National Bank (SNB) held a floor under EUR/CHF at 1.20, promising to stop the franc from getting stronger. Traders treated it as safe.

On 15 January 2015, with no warning, the SNB removed the floor. EUR/CHF fell from 1.20 to below 0.90 within minutes before partly recovering. Many stop-loss orders could not be filled anywhere near their price. Some traders lost more than their whole account, and several brokers went bust or needed rescue.

How Big the Market Has Grown

Every three years the Bank for International Settlements (BIS), the "central bank for central banks", surveys forex trading worldwide. Average daily turnover in April of each survey year:

Timeline