Why Learning The History Of Forex Can Help You Today

Why Learning the​ History of​ Forex Can Help You Today
Back in​ the​ days when kings thought they had a​ divine right to​ rule, they often wanted more money than their parliaments granted them .​
But most parliamentary bodies didn’t consist of​ fools; they certainly knew better than to​ leave the​ powerful tool of​ taxation solely in​ the​ king’s hands.
Without being able to​ tax to​ his heart’s content, the​ king’s other financial weapon was to​ devalue his country’s currency: recall all gold and​ silver coinage, melt it​ down, then reissue it​ in​ a​ lighter weight or​ with base metals mixed in, pumping up the​ royal treasury with the​ extra .​
Because the​ currency was backed more by the​ citizens’ confidence in​ the​ stability of​ their country than with anything else, many people never even noticed, and​ the​ king got his way in​ the​ end.
But sometimes people did notice, and​ sometimes they weren’t all that confident of​ the​ stability of​ their country, say, if​ a​ powerful enemy was threatening to​ invade .​
When that happened, often merchants refused to​ accept the​ devalued coinage in​ trade, demanding real gold or​ silver instead and​ rendering the​ king’s currency valueless .​
Such undermining of​ the​ currency could lead to​ a​ rapid collapse of​ the​ king’s government.
In the​ eighteenth and​ nineteenth centuries, the​ increasingly republican governments of​ the​ western world began basing their currencies, not on confidence in​ the​ government, but on gold .​
This prevented their rulers from devaluing the​ currency, but it​ had its own problems.
The gold standard lead to​ a​ cycle of​ boom and​ bust: a​ financially strong nation would import the​ goods its citizens wanted, leading to​ an​ outflow of​ capital until the​ money supplies shrank too far, in​ turn leading to​ higher interest rates and​ lower prices because nobody had enough money to​ buy anything .​
Then other countries would see the​ low prices and​ start importing the​ first nation’s goods, leading to​ an​ outflow of​ production but an​ inflow of​ money, pushing down interest rates and​ raising the​ standard of​ living again.
This boom-bust pattern continued in​ many western countries until World War I​ interfered with trade and​ stopped the​ flow of​ money across borders .​
The pattern resumed after the​ war and​ throughout the​ Roaring Twenties, until the​ 1929 stock market crash devalued the​ U.S .​
dollar and​ caused a​ worldwide depression .​
It was only relieved in​ the​ U.S .​
by the​ economic boom of​ World War II, when the​ production of​ war materials and​ the​ drafting of​ men into the​ military forces cured the​ problems of​ unemployment and​ high prices.
But although the​ Second World War eased economic ills in​ the​ U.S., it​ caused them in​ other countries, which had to​ purchase the​ war materials they couldn’t manufacture themselves .​
This led to​ an​ agreement known as​ the​ Bretton Woods Accord, signed in​ New Hampshire in​ 1944 and​ designed to​ create a​ stable post-war economy where the​ nations of​ the​ world could recover financially.
The Bretton Woods Accord pegged the​ value of​ the​ major world currencies to​ the​ U.S .​
dollar, making it​ the​ benchmark that measured all other currencies .​
It also pegged the​ U.S .​
dollar to​ the​ price of​ gold at​ $35 per ounce, and​ it​ created the​ International Monetary Fund (IMF), a​ confederation of​ 185 nations around the​ world, dedicated to​ fostering economic stability and​ high employment.
For decades, the​ Bretton Woods Accord worked well .​
But in​ the​ early 1970s, international trade grew to​ such an​ extent that currency rates could no longer be contained .​
Finally, in​ 1973, President Richard Nixon allowed the​ U.S .​
dollar to​ be taken off the​ gold standard, and​ the​ complex arrangement of​ currency values was abandoned.
The major currencies of​ the​ world have come full circle: just like in​ the​ old days of​ kings, the​ currencies are controlled by the​ market forces of​ supply and​ demand, without being pegged to​ any other currency or​ to​ any precious metal .​
(Some of​ the​ smaller nations of​ the​ world prefer to​ peg their currency to​ that of​ their major trading partner, like some Caribbean nations with the​ United States.) This created the​ Forex market, where one currency can be traded against another with the​ expectation of​ earning profit from changes in​ their relative values.
At first only major commercial and​ central banks traded the​ Forex .​
But as​ it​ became better known, hedge funds, mutual funds, large international corporations, and​ some super-wealthy individuals discovered it .​
By the​ 1980s, about U.S .​
$70 billion per day was changing hands.
The explosion of​ the​ Internet and​ the​ rise in​ computer security systems brought Forex trading online .​
With trades able to​ be placed independently of​ any bank, there was no longer any need to​ wait for​ business hours, and​ traders began dealing across time zones and​ around the​ globe.
In 2000, the​ U.S .​
Congress passed the​ Commodity Futures Modernization Act, which opened the​ Forex to​ the​ average investor .​
Retail brokerages sprang up across the​ Internet .​
Today about U.S .​
$1.5 trillion is​ traded per day; 5% of​ that amount is​ currency conversion by travelers, banks, and​ international corporations .​
The remainder is​ trading for​ profit.

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