Forex - A History of Currency Exchange: The Birth and Death of the Bretton Woods Agreement

by: Hollie Wilcox
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Word Count: 378

Forex, the foreign exchange market, has its roots in the relaxing of international currency exchange regulations that took place during the 1970s. In order to trade in Forex there is no need to appreciate its history; however neither is there any harm in doing so. Here we will look at how near financial meltdown in the United States economy eventually led to deregulation of currency exchange rates which opened the door to Forex as we now know it.

Currency exchange had been regulated by an international agreement know as the Bretton Woods agreement drawn up in 1944. Essentially this meant that the US dollar was tied to the value of gold, and that all other currencies of the other forty three participating countries would be pegged to the dollar and restricted to float up or down relative to it by a maximum of one percentage point. Governments would ensure that this parity with the dollar was maintained by buying and selling dollars as appropriate, and the US government would ensure that the dollar was maintained at a value of $35 per ounce of gold by buying or selling gold as appropriate. If for some specific reason it was no longer feasible for a country to maintain its dollar parity, then it could apply to the International Monetary Fund to have its parity value changed.

It was believed that such a system would encourage international trade by freeing it from the fear of sudden and large swings in the relative values of currencies. It also served to demonstrate that the centre of financial power had shifted away from Great Britain and to the USA and Great Britain was a reluctant signature to Bretton Woods, agreeing to it only after receiving $4.4 billion aid from the USA.

This worked for a while but then the USA started experiencing serious economic problems. The country tried desperately to maintain the $35 per ounce of gold parity but with various runs on gold and the pound sterling, the gold peg collapsed. During the 1970s inflation was rampant and the USA balance of payments turned very negative. Faced with rapidly declining national assets, in 1971 president Nixon unilaterally cancelled the Bretton Woods agreement.

Article Source: http://www.ArticleStreet.com/profile/hollie-wilcox-14216.html

About the Author

For more information on Forex trading or the foreign exchange market, visit the experts at www.worldforextrader.com

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