Forex Market
Forex Market History
The Gold Standard
Up until World War II and the Bretton Woods Agreement, the global economic system was dominated by the gold exchange standard. The gold exchange – which was implemented in 1876 – aimed at stabilizing world currencies by pegging them to the price of gold. While it did manage to stabilize currencies to some extent, it also created boom-bust patterns which eventually led to its dismissal.
This is what would happen. The more an economy would strengthen, the more it would import goods using up the gold reserves that backed its currency. The money supply would then dwindle, boosting interest rates and curbing growth until economic activity reached recession. The price of goods would drop to a point where they became very attractive to other countries, which would buy, injecting gold back into the economy and increasing money supply, restoring stability to the country’s economy. The boom-bust cycles prevailed throughout the gold standard until gold movement and trade flows were interrupted by World War I.
From then on, Great Britain’s Pound Sterling became the dominating currency by which other currencies were compared. This changed in 1944 with the Bretton Woods Agreements.
The Bretton Woods Agreements
The Bretton Woods Agreement, established in 1944 by the U.S. France and Great-Britain, were aimed at restoring world economic order by pegging national currencies to the US Dollar. Participating countries agreed to maintain their currency at a more or less steady value against the dollar, allowing a fluctuation of only one percent on either side of the fixed standard. The U.S. Dollar became a benchmark currency and economic supremacy shifted from Europe to the U.S. until post-war construction efforts created massive movements of capital which destabilized foreign exchanges rates as fixed under the Bretton Woods Agreements.
The Forex Market as We Know it Today
In 1971 the Smithsonian Accords replaced the Bretton Woods Agreement. They allowed for a larger fluctuation margin of the currencies. In an effort to reduce their dependency on the dollar, European countries signed a similar agreement. In 1973, both agreements, which repeated the same mistakes, collapsed, paving the way for the free-floating system which was officially mandated in 1978. In the 1980s, the advent of Internet and computer technologies as well as the rapid growth of the euro-dollar market contributed to creating market continuum for cross-border trades, and boosting the volume of foreign exchange transactions.