Money has been around in one form or another since the time of Pharaohs. MiddleEastern moneychangers were the first currency traders who exchanged coins from oneculture to another. However, during the middle ages, the need for another form ofcurrency besides coins emerged as the method of choice. The Babylonians are creditedwith the first use of paper bills and receipts. These paper bills represented transferablethird-party payments of funds, making foreign currency exchange trading much easier formerchants and traders.

From the stages of FX during the Middle Ages to WWI, the Forex markets were relatively stable and without much speculative activity. After WWI, the Forex markets became veryvolatile and speculative activity increased tenfold.

From 1931 until 1973, the Forex market went through a series of changes - many ofwhich have paved the way for the road ahead. The Forex market, as we know it today,originated in 1973.

The first major transformation, the Bretton-Woods Accord, took place toward the end ofWorld War II. The United States, Great Britain and France met at the United NationsMonetary and Financial Conference in Bretton Woods, New Hampshire to design a newglobal economic order.

The Bretton-Woods Accord was established to create a stable environment by which global economies could restore themselves. The Bretton-Woods Accord established thepegging of currencies and the International Monetary Fund (IMF) in hopes of stabilizingthe global economic situation.

Up until WWII, Great Britain's currency, the Great British Pound, was the major currency by which most currencies were compared. This changed when the Nazi campaign against Britain included a major counterfeiting effort against its currency. In fact, WWII vaulted the U.S. dollar from a failed currency after the stock market crash of 1929 to a benchmarkcurrency by which most other international currencies were compared.

Now, major currencies were pegged to the U.S. dollar. These currencies were allowed tofluctuate by one percent on either side of the set standard. When a currency's exchangerate would approach the limit on either side of this standard, the respective central bankwould intervene to bring the exchange rate back into the accepted range. At the sametime, the US dollar was pegged to gold at a price of $35 per ounce further bringingstability to other currencies and the world Forex situation.

The Bretton-Woods Accord lasted until 1971. Ultimately, it failed, but did accomplishwhat its charter set out to do, which was to re-establish economic stability in Europe and Japan. After the Bretton-Woods Accord came the Smithsonian Agreement in December of 1971.This agreement was similar to the Bretton-Woods Accord, but allowed for a greaterfluctuation band for the currencies.

In 1972, the European community tried to move away from its dependency on the dollar.The European Joint Float was established by West Germany, France, Italy, theNetherlands, Belgium and Luxemburg. The agreement was similar to the Bretton-WoodsAccord, but allowed a greater range of fluctuation in the currency values.

Both agreements made mistakes similar to the Bretton-Woods Accord and in 1973collapsed. The collapse of the Smithsonian agreement and the European Joint Float in1973 signified the official switch to the free-floating system. This occurred by default, asthere were no new agreements to take their place. Governments were now free to pegtheir currencies, semi-peg or allow them to freely float. In 1978, the free-floating systemwas officially mandated. In a final effort to gain independence from the dollar, Europecreated the European Monetary System in July of 1978. Like all of the previousagreements, it failed in 1993.

The major currencies today move independently from other currencies. The currenciesare traded by anyone who wishes. This has caused a recent influx of speculation by banks,hedge funds, brokers and individuals. The underlying factor that drives today's Forexmarkets, however, is supply and demand. The free-floating system is ideal for today's Forex markets.

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