Until World War I it was always allegedly feasible to go to the central bank and ask for gold or silver in the place of your bank notes. Naturally, this very infrequently happened in significant amounts and many state banks stopped keeping enough gold to cover. This was an important factor in the rise of the German nazi party and therefore might be announced to have caused world war 2.
To stop a similar disaster occuring in a vulnerable nation again, the Bretton Woods agreement was drawn up in 1944. This ‘permanently’ pegged all national currencies to the US dollar, and fixed the value of the buck against gold at $35 per oz.
This held until the early 1970s. But nations were developing at different rates and in different directions, and in 1971 President Nixon suspended the gold standard. The US dollar was dropped as a reference point for the majority of the major nationwide currencies, and the relative values of different currencies started to change according to economic conditions and market forces. Banks had to exchange money to supply their clients with foreign currencies for travel and importing goods, but pretty soon they were exchanging much more than they wanted so as to profit from the continuous rise and fall in the values of the different currencies.
Gradually, private investors joined in the game and the forex market mushroomed. The development of the web meant that the market became accessible to anyone, in principle. At about that point in forex history, daily trading turnover has reached between $3 and $4 trillion, more than the trading volume of all the world’s stock and bonds markets added together.
