Currency Trading Tips : Bretton Woods Agreement

This article is one of our currency trading tips. This is a brief overview of the Bretton Woods System as it plays a vital part in modern day currency trading. It played an integral part in unifying the world as well as creating the IMF and World Bank. Although our currency trading tips usually go over new topics, I firmly believe knowing the history will help a new trader.

The Bretton Woods Agreement in short, was the unification of the world’s currency and giving each currency a value in dollars. Currency trading was unified by this system, and paved the way for modern day trading as we all know it. Nations that signed the Bretton Woods Agreement set a specific exchange rate for their currency which would translate into dollars. This was done by specifically calculating the inflation and deflation of the currency. If the currency in question was dipping too low in price, the government would literally buy their own currency back.

On the other hand, it the pricing was increasing too much, more currency was printed and distributed. The IMF as well as the World Bank were both created to help facilitate this. One of our currency trading tips is to STAY AWAY FROM INFLATION/DEFLATION. Many currencies are more prone to inflation and deflation. The Bretton Woods Agreement helped in hedging this.

Many people have asked why the dollar was chosen as the main currency. Well, before the Bretton Woods Agreement was put into place, all currency had to be backed by gold. The United States owned most of the gold in the world, so the dollar was deemed a safe currency. The agreement more or less replaced gold for dollars in what the world’s currencies were worth. However, the dollars were still backed up by gold. This was seen as a sort of a pseudo-Gold Standard. This is also is shown through our most recent economy. A lot of countries unofficially use the dollar as their currency. Why? Because of the stability that it has. Another attribute in recent forex thinking that can be traced to the Bretton Woods Agreement.

Moving on… In 1971 currency trading completely changed. The dollar’s price started to show signs of inflation since it was not yet officially a global currency. The US at this point was also suffering through a major recession. Because of this, the US was going through stagflation. In Economic terms, Stagflation is like the Black Plague. We will write an article on Stagflation later on to help with more currency trading tips. To battle this, President Nixon started to deflate the dollar’s value in gold. This in turn backfired as everyone then started to convert their dollars into gold. In 1973, the dollar cut ties with gold altogether.

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