The History of the Forex: From Beginning to the End of Bretton Woods

While you are educating yourself at being a Forex market investor or speculator, it's probably a good idea to know a little bit about the history of it. Given its global nature and significance, knowing the significance of certain historical events relative to the impact on currencies is always good knowledge to have before entering the trading arena. Additionally, being aware of the international monetary system and how it has evolved to its present state is also good ammunition.

When the Gold Standard system was implemented in 1875, it was one of the most significant historical factors involving the Forex market. Prior to the gold standard being in effect, countries were already using gold and silver for the purposes of international commerce. Suffice it to say, this was all well and good unless the value of these metals were affected by supply and demand. For example, every time a new gold mine opened up, the supply increased. Therefore the price of the metal dropped which consequently decreased its buying power.

The premise of the gold standard was that a country's government could guarantee the conversion of its currency into a specific amount of gold, which meant that the country would back the currency using the precious metal. The downside was that a country needed to have substantial gold reserves in order to do this. Consequently, by the end of the 19th century, most countries had defined an amount of their currency up against an ounce of gold. As a result, the differing price of an ounce of gold between two different currencies became the exchange rate for trading the two particular currencies. It also became the first standardized means in history of exchanging currency.

During the beginning of World War I, the gold standard broke down resulting from the political tension resulting from Germany's aggression. The European powers felt a need to large military projects and the financial impact of these projects was so widely felt in their economies that their gold reserves wasn't enough to cover the currencies that were being printed. The gold standard staged a slight comeback between the two World Wars but by the start of World War II, most countries had completely dropped utilizing it as a means of backing their currencies. However, gold has never ceased to be the ultimate form of monetary value.

Just before the end of the Second World War, the Allied nations surmised that they would need to set up some sort of monetary system that would fill the void left from the demise of the gold standard. Over 700 delegates worldwide formulated the Bretton Woods System (named after the New Hampshire location where the gathering was held) in July of 1944. What resulted was the formation of the following:

1. a method for fixing exchange rates with the different currencies of the world

2. the US dollar replaced the gold standard as the primary reserve currency

3. the creation of the General Agreement for Tariffs and Trade (GATT), the International Bank for Reconstruction and Development, and the International Monetary Fund (IMF) to oversee global economic activities

But as history has demonstrated, this too would come to pass primarily due to the fact that for nearly 30 years after the creation of the Bretton Woods System, the US had to run numerous balances of payment deficits in order to continue being the global currency reserve. At the outset of the 1970's, the US gold reserves were so depleted that the US Treasury could no longer cover all the US dollars that foreign banks held as reserves and on August 15th, 1971 that the gold reserve window was officially closed.

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