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Although today Fx trading is one of the most profitable and known worldwide, we should go back to the 40s of the last century to discover the origins of this lucrative market. What were its cornerstones?
After the turbulent years, the time of stability came in the 40s. In the year 1944, the famous Bretton Woods agreement was signed, which aimed to ensure that different countries that had achieved stability in the monetary aspect were prevented from the transfer of capitals between nations and the proliferation of speculators.
Before this agreement, the monetary value had been awarded based on the gold reserves of each nation. This form of evaluation did not offer stability as it led to periods of extremely exaggerated growth and decrease.
The process was as follows: when a country entered into the stage of development, it imported merchandise, thus, reduced its gold supplies being the basis of the currencies with which the transactions were paid. In such a way, the monetary amount decreased while the interest rate increased. This caused a decrease in economic activity that led to the recession.
When domestic consumption collapsed, product prices decreased, which in turn made them internationally competitive again, hence, they were exported to other countries. In this way, a new cycle of economic ascent began, during which gold reserves underwent a new growth cycle.
In the context of those fluctuations, it was essential to find a method that could end with such a situation of those rises and decreases. It was necessary to achieve the stability that could make it possible to find a sustainable balance in the economic aspect and to make the upward and downward cycles smooth.
What is the Bretton Woods Agreement?
The BW agreement established the exchange value of all currencies against the dollar, and, in turn, the dollar against gold. The governments of the different countries agreed that their currencies would maintain a limited margin of variation against the dollar. On the other hand, it was forbidden for the Central Banks of different countries to devalue their currencies arbitrarily to make prices competitive and increase the export of products.
Was the BW Agreement Always Implemented?
There were different reasons why it could not always be done, especially in the 50s and 60s. In 1971, the agreement had to be terminated, and again the law of supply and demand took its place, with all that it implied, including the level of volatility and speed in currency exchange.
In the 80s, new technologies began to be used making it possible for the currency markets to globalize and operate in different markets of the world without being contingent on time zones.
Finally, the emergence and spread of the Internet made currency markets accessible to all investors who wanted it. This made it the largest capital market in the world. Today, that international foreign currency exchange market is what we know as FOREX.