Why is the history of forex trading so important?
If you don’t learn from the past, you’re doomed to repeat the same mistakes.
Learning about the origins of currency markets allows us to learn from history. As the saying goes, ‘History doesn’t repeat, but it often rhymes.’ If you take the time to learn the lessons of the past, you can better recognise patterns when history rhymes to profit in the future.
Brief history of forex
Going back to when it all started, the barter system was introduced by Mesopotamian tribes around 6000 BC. It allowed different tribes to exchange their goods for other goods and services. Barter systems still stand today, although they are more common in developing countries.
The barter system was replaced by the monetary system.
You’ve probably heard the saying, ‘Gold is money.’ Gold coins were durable and limited in their supply, so gold was widely accepted as money. The first gold coins were struck around 6 BC. But they were extremely heavy, which made them impractical for trade.
Countries slowly introduced paper money.
Governments managed the transition by paying interest on paper money in the 1800s. They also introduced a gold standard to build confidence. That meant you could exchange your paper money for an equal amount of gold. The gold standard worked well until the Great Depression. During those uncertain times, everyone hoarded their gold.
From Wikipedia: ‘On April 6, 1933, The New York Times wrote under the headline “Hoarding of Gold”, “The Executive Order issued by the President yesterday amplifies and particularizes his earlier warnings against hoarding. On March 6, taking advantage of a wartime statute that had not been repealed, he issued Presidential Proclamation 2039 that forbade the hoarding ‘of gold or silver coin or bullion or currency’, under penalty of $10,000 and/or up to five to ten years imprisonment.”’
President Franklin D. Roosevelt devalued the price of gold to the US dollar on April 5, 1933. Roosevelt’s idea was to make gold less valuable. He hoped people would spend their gold or exchange it for paper money.
The new gold standard remained until August 15, 1971. That’s when the floating exchange system started under Bretton Woods.
The History of Forex: Bretton Woods Agreement (1944 to 1971)
As the Second World War was ending, the leaders of the United States, France and the United Kingdom met in Bretton Woods, USA. The idea was to create a new direction for their economies. The agreement, also known as the Bretton Woods Accord, was to create a new and stable environment for European currencies to be restored.
During the war, European countries’ economies and currencies suffered heavily. The US dollar was more stable than European currencies. The US wasn’t bombed and made all the military equipment for the Allies.
Bretton Woods formed a pegged currency system that was tied to gold. Countries could peg their currencies to the US dollar, which was pegged to gold. If a country didn’t want its US dollars, it could exchange them for gold.
Unfortunately, the US sharply increased spending and borrowed money after the war, and the agreement failed. The US, once owning more than 75% of the world’s gold supply, was running out of gold. There wasn’t enough gold for the world to peg to the US dollar.
US President Richard Nixon ended the Bretton Woods Agreement in 1971. That was a significant event in the history of forex.
The floating currency system (1971)
In 1971, the Smithsonian Agreement was signed and Nixon ‘closed the gold window’. The US no longer allowed foreign central banks to exchange dollars for gold. It also devalued the dollar by roughly 8.5% to $38 per ounce.
The Smithsonian Agreement closely resembled the Bretton Woods Agreement. The US dollar was still pegged to gold. But other countries could only move their currencies within a 2.25% band against the US dollar.
European currencies kept moving towards the top of their bands during 1972. Soon their currencies exceeded the allowed 2.25% against the US dollar. The US was borrowing and spending too much on its military, which made the US dollar unattractive.
European countries wanted to move away from the US dollar in 1972.
Gold rose to around $60 per ounce in mid-1972 and then to $90 by early 1973. The US dollar was still pegged to gold. US$38 would buy an ounce of gold in 1972. Speculators thought the gold was worth more money, so countries chose to buy gold instead of US dollars. The US abandoned the gold standard in 1973.
The Plaza Accord (1985)
The leaders of the world’s five largest countries met at the Plaza Hotel in New York City in 1985.
The meeting was called because the US dollar was too high.
The Japanese bought about one-third of the US national debt. That pushed the US dollar up against the yen by 50% and was making trade more expensive for other countries. After the meeting, the G-5 released a statement encouraging the appreciation of non-dollar currencies.
This meeting was called the Plaza Accord.
The US dollar crashed soon after into 1987, and was partially responsible for the 1987 stock market crash. Traders realised that there were large profits up for grabs trading forex. A new market was born.
Maastricht Treaty and the euro (1992 to 1998)
European countries wanted stability in the region, as well as the chance to re-build their economies. The Maastricht Treaty was born.
This led to the formation of the European Union (EU).
To support foreign affairs and security, new policies were announced. These provided businesses and banks with security, while reducing currency risks. The European Union (EU) resulted in the creation of the eurozone. The eurozone countries adopted a common currency ― the euro.
Unfortunately, the euro wasn’t formed correctly from the outset. The eurozone didn’t consolidated its debts. Unlike the US, the eurozone doesn’t have a centralised bond market.
Why does this matter?
All states consolidated their debts when forming the US dollar. If one state goes bankrupt (i.e. Detroit in 2013), it doesn’t affect the foreign credit status of the US dollar. In comparison, if Greece went bankrupt (as it nearly did in 2012 and 2017), it would likely cause a debt default contagion across Europe.
This would offer trading opportunities to short the euro.
Trading forex on the internet (1990s to now)
In the 1990s, currency markets became advanced and forex markets grew. Back then, only large banks and institutions had access to currency markets. Traders can now speculate and trade from their homes.
The internet changed markets forever.
The history of forex has changed forever.
Communication equipment continues to improve and internet speeds keep increasing. This means quicker execution times and cheaper costs for forex. Forex is the largest market in the world today. It has a turnover of $5.1 trillion daily.
Your ‘Start With Forex’ takeaway: The History of Forex
If you remember one thing from this lesson, let it be this ― history rhymes. Understanding the events that shaped the past gives you more perspective to trade the future.
Everything is connected.
Past events are foundation stories.
The trends of the future will be based on these past stories.
Remember, trading forex is about the study of economies and countries. It’s an international game. You should be aware of major events across the globe. Therefore, knowing some history helps you understand the world economy today.
I hope you saw value in this forex lesson ― there’s loads more value to come. It’s one thing trading real money. But if you don’t build a solid education at the start, you’re doomed to repeat the mistakes of the past. So, if you’re ready to learn about what is forex volume and how to use it to your advantage, click here.
To your trading success,
Start With Forex
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Lesson Two: Understanding Forex Trading Terms