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Forex Trading History
In 1967, a Chicago bank refused a loan in transfers generated by post-war
pound sterling £ sought by a college construction. This destabilized foreign
professor by the name of Milton Friedman. exchange rates that had been set up in
He had intended to use the funds to The Bretton Woods Agreement.
short the British currency. Mr. Friedman The Bretton Woods Agreement was finally
had perceived sterling to be priced too abandoned in 1971, and the gold window
high against the dollar, and wanted to was closed on the US dollar. By 1973,
sell the currency, then later buy it back currencies of major industrialized
to repay the bank after the currency nations became more freely floating,
declined, thus pocketing a quick profit. mainly controlled by forces of supply and
This is what's known as 'Selling Short'. demand acting in the foreign exchange
The bank's refusal to grant the loan was market. Prices were floated daily, with
due to the Bretton Woods Agreement, volumes, speed and price volatility
established twenty years earlier, which increasing through the 1970s These
fixed national currencies against the fluctuations gave rise to new financial
dollar, and set the dollar at a rate of instruments, market deregulation and
$35 per ounce of gold. trade liberalization.
The Bretton Woods Agreement, set up in Beginning in the 1980s, international
1944, aimed at installing international capital movements accelerated with the
monetary stability by preventing money explosion of computer technology and high
from fleeing across national borders, and speed communications. The world wide
restricting speculation in the world markets became virtual 'local market'
currencies. Prior to the Agreement, the through Asian, European and American time
gold exchange standard--prevailing zones. Transactions in FOREX zoomed from
between 1876 and World War I--dominated about $70 billion a day in the 1980s, to
the international economic system. Under more than $1.5 trillion a day two decades
the gold standard, currencies gained a later.
new phase of stability as they were THE EUROMARKET
backed by the price of gold. It A major catalyst to the increase in
abolished the arbitrary practice used by foreign exchange trading was the rapid
kings and dictators of arbitrarily development of the Eurodollar market,
debasing money and triggering inflation. where US dollars are deposited in banks
But the gold standard wasn't without outside the US. Similarly, Euro markets
faults. As an economy strengthened, its are those where assets are deposited
imports would heavily increase until it outside the currency of origin.
ran down the gold reserves required to In the 1950s Russia's oil revenues-- all
back its money. This would cause the in dollars -- were deposited outside the
money supply to shrink, interest rates US in fear of being frozen by US
would rise and economic activity could regulators. This gave rise to a vast
slow to the extent of recession. offshore pool of dollars outside the
Eventually, prices of goods had to hit control of US authorities with the
bottom, and become attractive to other attendant creation of The Eurodollar
nations, which would rush into buying market. The US government imposed laws to
frenzies that injected the economy with restrict dollar lending to foreigners.
gold until it increased its money supply, Euro markets were particularly attractive
thus driving down interest rates and because they had far fewer regulations
recreating wealth in the economy. Such and offered higher yields. From the late
boom-bust patterns prevailed throughout 1980s onwards, US companies began to
the gold standard until the outbreak of borrow offshore, finding Euro markets an
World War I interrupted trade flows and advantageous center for holding excess
the free movement of gold. This of liquidity, providing short-term loans and
course was followed by 'The Great financing imports and exports.
Depression', which arguably was ended by London was the principal offshore market,
World War II. as it remains even now. In the 1980s, it
After the Wars, the Bretton Woods became the key center in the Eurodollar
Agreement was established, whereby market when British banks began lending
participating countries agreed to try and dollars as an alternative to pounds. This
maintain the value of their currency with allowed them to maintain their leading
a narrow margin against the dollar and a position in global finance. London's
corresponding rate of gold as needed. convenient geographical (Time Zone)
Governments were prohibited from location (operating during Asian, Pacific
devaluing their currencies to their trade and American markets) is also
advantage and were only allowed to do so instrumental in preserving its dominance
for changes of less than 10%. Through in the Euromarket.
the 1950s, the ever-expanding volume of Copyright © C. R.
world-wide trade led to massive capital