A Short History of Currency
Before humanity invented currency, the preferred method of trade was called “barter.” For example, three coconuts would be traded for one big fish. This became problematic, however, when two traders carried goods that were not of equal value. For example, if one person had a coconut, and another had a live ox, the two would not be able to carry out any transaction whatsoever.
For this reason, it became crucial to invent a unique method of payment. In the days of the Egyptians and the Greeks, the popular method of exchange was with Gold coins. This adoption of Gold coins as currency laid the foundation for our modern banking system.
In the Gold standard era, new problems arose. If one wished to make a large transaction, like buying a house, it was not practical to lug around wagon-loads of Gold to pay the seller. Instead, one could store his Gold in a bank vault, and, in exchange, receive a receipt for the Gold held in his vault. This receipt could then be passed on to the seller, who could redeem his receipt for Gold any time he wished.
The receipt-for-Gold system eventually transformed into our modern paper money system. Up until 1913, the Twenty Dollar American bill could be exchanged for twenty dollars’ worth of Gold. It is no wonder that today, Gold is considered a “safe-haven” for investors. Despite all of the paper currencies that have risen and fallen over the years, Gold has consistently retained its value.
After WWII, The US Dollar Becomes the Foundation of the Global Economy
In 1944, the global economy was in ruins. Two world wars had shattered the infrastructure of the world’s most prosperous cities. In Europe, especially, it was difficult to find a city that had not been affected by the disastrous consequences of battle. However, out of the infernos of destruction, one country appeared to have prospered from the wars. That country was America.
There is an old myth that “War is good for the economy.” This is false. In truth, “War is good for the economy when you are not in it, and you are selling food and supplies to those who are in it.” This is precisely what America did over the two World Wars. In exchange for food and supplies, America received Gold reserves from the leading European nations. By the end of World War II, America had two-thirds of the world’s Gold reserves. In addition, America was one of the most efficient economies, and the world’s leading exporter. These facts made the US Dollar a fitting candidate to serve as the foundation of the world’s new monetary system.
In 1944, the world’s powers met in Bretton Woods, New Hampshire, to discuss a new monetary system. The leaders agreed that, in the new system, practically every nation’s currency would be redeemable, at a fixed rate, for US Dollars, which would, in turn, be redeemable for real Gold.
In 1971, The Foreign Exchange Market is Born
The system which came to be known as the “Bretton Woods System” worked well for almost 30 years. The only problem was that, between 1944 and 1971, over 50% of its America’s Gold was redeemed by foreign parties. Had America lost all of its Gold, the world’s monetary system easily could have collapsed. US President Richard Nixon was, therefore, forced to take drastic measures.
On August 15th, 1971, President Richard Nixon, announced on live television:
“I have directed Secretary Connally to suspend temporarily the convertibility of the dollar into gold or other reserve assets, except in amounts and conditions determined to be in the interest of monetary stability and in the best interests of the United States.”
This announcement came to be known as “The Nixon Shock” by economists around the world. It paved the way for a new global monetary system. No longer would the world’s currencies be exchangeable at a fixed rate to the US Dollar, and Gold. Instead, the new system came to be regarded as “freely floating fiat currencies,” and this system has remained with us until today.
Fiat currencies derive their value from a country’s laws and regulations. Today, the Foreign Exchange markets average up to $5 trillion of transactions per day. By understanding how the system works, traders are empowered to trade at their convenience, from just about anywhere on the globe.