Why Learning The

History Of FX Trading
Will Help You?

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 didnt consist of fools; they certainly knew better
than to leave the powerful tool of taxation solely in the kings hands.








Without being able to tax to his hearts content, the kings other financial
weapon was to devalue his countrys 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 werent 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 kings currency valueless. Such undermining of
the currency could lead to a rapid collapse of the kings 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 nations 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 couldnt
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 and FX trading.








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
Fx 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 FX trading for profit.


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