History of Forex

How many people know why Forex exists at all? They know about the “Nixon Shock” , but why did Nixon float the dollar, who suggested it, and how does that impact modern Forex? The simplest solution being the most likely would indicate the US Administration was politically stretched out and had few options in response to demands by the French for payment in Gold, and the West German removal from Breton Woods. According to the Wikipedia entry:

By the early 1970s, as the costs of the Vietnam War and increased domestic spending accelerated inflation, the U.S. was running a balance of payments deficit and a trade deficit, the first in the 20th century. The year 1970 was the crucial turning point, which, because of foreign arbitrage of the U.S. dollar, caused governmental gold coverage of the paper dollar to decline 33%, from 55% to 22%. That, in the view of Neoclassical Economists and the Austrian School, represented the point where holders of the U.S. dollar lost faith in the U.S. government’s ability to cut its budget and trade deficits.

In 1971, the U.S. government again printed more dollars (a 10% increase) and then sent them overseas, to pay for the nation's military spending and private investments. In the first six months of 1971, $22 billion dollars in assets left the U.S.[citation needed] In May 1971, inflation-wary West Germany was the first member country to leave the Bretton Woods system — unwilling to deflate the deutsche mark to prop up the dollar.[3] In order to prevent the dumping of the deutsche mark on the open market, West Germany did not consult with the international monetary community before making the change. In the next three months, West Germany’s move strengthened their economy; simultaneously, the dollar dropped 7.5% against the deutsche mark.

Because of the excess printed dollars, and the negative U.S. trade balance, other nations began demanding fulfilment of America’s “promise to pay” — in the form of gold from the U.S., in exchange for paper dollars, thus, did Switzerland trade $50 million of paper for gold in July. France, in particular, repeatedly made aggressive demands, and acquired large amounts of gold ($191 million), further depleting the gold reserves of the U.S. On 5 August 1971, Congress released a report recommending devaluation of the dollar, in an effort to protect the dollar against foreign price-gougers. Still, on 9 August 1971, as the dollar dropped in value against European currencies, Switzerland withdrew the Swiss franc from the Bretton Woods system.
Arbitrage can be painful if you are on the wrong side of it. Nixon may have had few options but to float the dollar; the market is a powerful force even with government regulations.

This implies that it was a reaction, not an action. In other words, it wasn’t part of a grand master plan, a scheme designed by international bankers to make the world’s financial markets crumble 35 years later. It seems that it was a random, haphazard solution, as they say “Crisis Management”. But while waiting for Bonanza to finish, to announce the new global Forex regime, Nixon’s team actually spent more time debating how to announce and when to announce to the public than the plan itself:

To stabilize the economy and combat runaway inflation, on August 15, 1971, President Nixon imposed a 90-day wage and price freeze, a 10 per cent import surcharge, and, most important, “closed the gold window”, making the dollar non-convertible to gold — except on the open market. The President and fifteen advisors took that decision, without consulting the members of the international monetary system, thus, the international community informally named it the Nixon shock. Given the importance of the announcement — and its impact upon foreign currencies — presidential advisors recalled that they spent more time, at Camp David, deciding when to publicly announce the controversial plan, than they spent creating the plan.

As a politician, the President did not want to interrupt television viewers watching the tremendously popular TV series Bonanza, not wishing to potentially alienate those voters who fanatically followed the cowboy series. He was advised that the practical decision was to make an announcement before the stock markets opened on Monday (and just when Asian markets also were opening trading for the day). On 15 August 1971, that speech and the price-control plans proved very popular and raised the public’s spirit. The President was credited with finally rescuing the American public from price-gougers, and from a foreign-caused exchange crisis.

This would also hint it was a knee-jerk reaction more than a carefully planned event. Since then, banks have been creating models ‘on the fly’ based on what seems to be working, with little or no understanding of the underlying forces. And being as banks are for profit private institutions, any available data or models they have is not public.