You want to know how it all started? Read about the beginnings and the history of Forex.
Gold Standard System
In 1875: Creation of the gold standard as a monetary system.
Before that time the countries used gold and silver as a tool for international payment. They defined ounce of gold as the price difference between the exchange rate of two currencies. This is the first standardized way to exchange currency in history.
The gold standard eventually broke down at the beginning of World War I. due to political tensions in Germany. Due to the need for the completion of major military projects, the financial burden of these projects was so big, that at that time there was not enough gold.
During the interwar period was a golden age attempted to normalize again, but it crashed again after the arrival of World War II. Nevertheless, gold has never ceased to be the final form of monetary value.
Bretton Woods System
22nd of July 1944, brought together 730 delegates from 44 countries and they reached an agreement in Bretton Woods in New Hampshire, which should help to establish a fixed exchange rate, which has been so far in gold for all major currencies.
U.S. dollar replaced gold standard and $ become primary reserve currency, which will be backed by gold (this was the main reason for the final failure).
The establishment of three international agencies to control economic activities (IMF – International Monetary Fund, the International Bank for Reconstruction and Development and the GATT – General Agreement on Tariffs and Trade ).
1959 became system operational, when in Europe currencies have become convertible.
In the next 25 years, there was a lot of pressure on the $ and in early 1970 gold reserves have been exhausted and the U.S. did not have enough gold to cover all the dollars that have been placed as a reserve in foreign state banks.
15th of August 1971, U.S. President Richard Nixon closed the gold window and the U.S. has announced that it will no longer be receiving gold for $ that were in foreign currency reserves. This was the end of the Bretton Woods System.
Bretton Woods System has left an important legacy that still has a significant effect on the current international economic environment. This legacy exists in the form of three international agencies established in 1940: the International Monetary Fund, the International Bank for Reconstruction and Development (now part of the World Bank) and GATT, the predecessor of the World Trade Organization.
The system of floating exchange rate (Current Exchange Rates)
Under the system of Bretton, world has finally admitted the use of floating exchange rates and reached an agreement in Jamaica in 1976.
This meant permanently eliminate the use of gold.
However, this does not mean that the government adopted a free-floating exchange rate system.
Most governments have chosen one of the following three systems of exchange rates, which are still used today:
- bound rates (Pegged rate) and
- a system with a variable interest rate (Managed floating rate).