The Gold exchange period and the Bretton-Woods Agreement
The Bretton-Woods Agreement, established in 1944, fixed national currencies against the US dollar, and set the dollar at a rate of USD 35 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. Bretton-Woods was aimed at establishing international monetary stability by preventing money from taking flight across countries, thus curbing speculation in foreign currencies. Between 1876 and World War I, the gold exchange standard had ruled over the international economic system. Under the gold standard, currencies experienced an era of stability because they were supported by the price of gold.
However, the gold standard had a weakness in that it tended to create boombust economies. As an economy strengthened, it would import a great deal, running down the gold reserves required to support its currency. As a result, the money supply would diminish, interest rates would escalate and economic activity would slow to the point of recession. Ultimately, prices of commodities would hit rock bottom, thus appearing attractive to other nations, who would then sprint into a buying frenzy. In turn, this would inject the economy with gold until it increased its money supply, thus driving down interest rates and restoring wealth. Such boom-bust patterns were common throughout the era of 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. 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 export markets, and were only allowed to devalue their currencies by less than 10%. Post-war construction during the 1950s, however, required great volumes of Forex trading as masses of capital were needed. This had a destabilizing effect on the exchange rates established in Bretton-Woods.
In 1971, the agreement was scrapped when the US dollar ceased to be exchangeable for gold. By 1973, the forces of supply and demand were in control of the currencies of major industrialized nations, and currency now moved more freely across borders. Prices were floated daily, with volumes, speed and price volatility all increasing throughout the 1970s. New financial instruments, market deregulation and trade liberalization emerged, further stoking growth of Forex markets. The explosion of computer technology that began in the 1980s accelerated the pace by extending the market continuum for cross-border capital movements through Asian, European and American time zones. Transactions in foreign exchange increased rapidly from nearly $70 billion a day in the 1980s, to more than $2 trillion a day two decades later.
However, the gold standard had a weakness in that it tended to create boombust economies. As an economy strengthened, it would import a great deal, running down the gold reserves required to support its currency. As a result, the money supply would diminish, interest rates would escalate and economic activity would slow to the point of recession. Ultimately, prices of commodities would hit rock bottom, thus appearing attractive to other nations, who would then sprint into a buying frenzy. In turn, this would inject the economy with gold until it increased its money supply, thus driving down interest rates and restoring wealth. Such boom-bust patterns were common throughout the era of 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. 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 export markets, and were only allowed to devalue their currencies by less than 10%. Post-war construction during the 1950s, however, required great volumes of Forex trading as masses of capital were needed. This had a destabilizing effect on the exchange rates established in Bretton-Woods.
In 1971, the agreement was scrapped when the US dollar ceased to be exchangeable for gold. By 1973, the forces of supply and demand were in control of the currencies of major industrialized nations, and currency now moved more freely across borders. Prices were floated daily, with volumes, speed and price volatility all increasing throughout the 1970s. New financial instruments, market deregulation and trade liberalization emerged, further stoking growth of Forex markets. The explosion of computer technology that began in the 1980s accelerated the pace by extending the market continuum for cross-border capital movements through Asian, European and American time zones. Transactions in foreign exchange increased rapidly from nearly $70 billion a day in the 1980s, to more than $2 trillion a day two decades later.
