Forex is an international money exchange market, where can
we buy or sell various currencies. Want to know history of forex market?
Read here:
The Bretton Woods Agreement, established in 1944, fixed
national currencies against the dollar, and set the dollar at a rate of 35USD
per ounce of gold. In 1967, a Chicago bank refused to make a loan in pound
sterling to a college professor by the name of Milton Friedman because he had
intended to use the funds to short the British currency. The bank's refusal to
grant the loan was due to the Bretton Woods Agreement.
This agreement aimed at establishing international monetary
steadiness by preventing money from taking flight across countries, and curbing
speculation in the international currencies. Prior to Bretton Woods, the gold
exchange standard - dominant between 1876 and World War I - ruled over the
international economic system. Under the gold exchange, currencies experienced
a new era of stability because they were supported by the price of gold.
However, the gold exchange standard had a weakness of
boom-bust patterns. As an economy strengthened, it would import a great deal
until it ran down its gold reserves required to support its currency. As a
result, the money supply would diminish, interest rates escalate and economic
activity slowed to the point of recession. Ultimately, prices of commodities
would hit bottom, appearing attractive to other nations, who would sprint into
a buying fury that injected the economy with gold until it increased its money
supply, driving down interest rates and restoring wealth into the economy. Such
boom-bust patterns abounded throughout the gold standard until World War I
temporarily discontinued trade flows and the free movement of gold.
The Bretton Woods Agreement was
founded after World War II, in order to stabilize and regulate the
international Forex market. Participating countries agreed to try to maintain
the value of their currency within a narrow margin against the dollar and an
equivalent rate of gold as needed. The dollar gained a premium position as a
reference currency, reflecting the shift in global economic dominance from
Europe to the USA. Countries were prohibited from devaluing their currencies to
benefit their foreign trade and were only allowed to devalue their currencies
by less than 10%. The great volume of international Forex trade led to massive
movements of capital, which were generated by post-war construction during the
1950s, and this movement destabilized the foreign exchange rates established in
the Bretton Woods Agreement.
1971 heralded the abandonment of
the Bretton Woods in that the US dollar would no longer be exchangeable into
gold. By 1973, the forces of supply and demand controlled major industrialized
nations' currencies, which now floated more freely across nations. Prices were
floated daily, with volumes, speed and price volatility all increasing
throughout the 1970s, and new financial instruments, market deregulation and
trade liberalization emerged.
The onset of computers and
technology in the 1980s accelerated the pace of extending the market continuum
for cross-border capital movements through Asian, European and American time
zones. Transactions in foreign exchange increased intensively from nearly $70
billion a day in the 1980s, to more than $1.5 trillion a day two decades later.
