Forex Exchange trading dates back to the 17th or 18th Century, where countries would use gold and silver as their means of payment and medium of exchange. These payment methods were however very elastic, and their value kept shifting due to the laws of international supply and demand. For instance, the discovery of a new gold mine often resulted in a significant drop in the value of gold.
Gold Standard monetary system
The instability of the metals value saw the creation of the Gold Standard Monetary system. Through the system, different governments agreed to convert their currencies into a specified amount of gold and to convert a specific amount of gold into a said amount of money. Towards the end of the 19th-century, major economic countries had their currencies pegged to one ounce of gold, and the difference between the price of a gold ounce between currencies of countries was considered the exchange rate. It was a novel idea that seemed to work at first. However, it was not devoid of challenges. For starters, it meant that governments needed to hold large reserves of gold to satisfy the ever-increasing currency exchange demand. Then came the first world war which piled pressure on European countries to print more money to finance military projects. The increased money demand overwhelmed the gold supply; leaving many countries with little option other than to drop the use of the gold standard.
The Bretton Woods System
Even though many major economic countries had abandoned the Gold Standard, they still felt the urge to get a workable solution. In July of 1944, just before the 2nd World War ended, over seven hundred representatives from Allies converged in Bretton Woods in New Hampshire, leading to the formation of the Bretton Woods System of International Monetary Management.
The Bretton Woods declaration introduced the system of fixing exchange rates, the decision of using the US-dollar as the single reserve currency and the only currency to have a gold backing. The IMF, the GATT and the International Bank for Reconstruction and Development also emerged from the Bretton Woods deliberations.
Having the US dollar as the only currency with a gold backing was nevertheless an under sight as they later on realised. It put overwhelming pressure on the US Treasury gold reserves, so much such that twenty-five years later, President Richard Nixon had to shut the gold window terminating the exchange of dollar for gold in 1971. That saw the collapse of the Bretton Woods System.
The Now Exchange rate
The breaking down of the Bretton Woods compelled the country economies to settle for Managed floating exchange rates in 1976 at the Jamaican Agreement. Even though under this arrangement countries were to abandon the standard gold use, many of them included the use of the Dollarization and Pegged rate to the Managed floating rate. Under the pegged rate, countries pegged or linked their currencies to the dollar at a value of $35 an ounce making the US the real Gold-standard economy.
Furthermore, it led to the emergence of the current Forex exchange. Different economies, therefore, ended up trading with the dollar but still pursued their strategies of ensuring currency stability. Initially, all the Foreign Exchange trading was the preserve of the Central banks and government institutions, however over time, other players including individuals came in, resulting in the Foreign Exchange market as we know it.