The History of Forex Trading

Gold Standard System

In 1875, the history of the Forex market was changed by the creation of the Gold Standard system. Prior to this, countries would use gold and silver as international payment. The problem being, the value of these metals was greatly affected by supply and demand. For example, the discovery of a new gold mine, would drive the price of gold down.

The Gold Standard was basically a guarantee by the governments that converted currencies into specific amounts of gold, and vice versa. This meant that governments needed a large mount of gold reserve in order to meet the demand of currency exchanges. In the late 1800s, major economic countries created an amount of currency to one ounce of gold. Over time, this became the exchange rate for those countries. This represented the first official means of currency exchange in history.

During the beginning of World War I, due to the political tension with Germany, the Gold Standard began to break down. The major European powers began printing more money to help pay for military projects. The financial burden of these projects was so substantial that there was not enough gold at the time to exchange for all the extra currency that the governments were printing off.

The Gold Standard made a small comeback during the years between the wars, but most countries had dropped it again by the onset of World War II. However, to this day, gold is the ultimate form of monetary value. (For more on this, read What Is Wrong With Gold? and Using Technical Analysis In The Gold Markets.)

Bretton Woods system

When the Gold Standard system was abandoned, the Allied nations were driven to create a new monetary system. In July 1944, over 700 representatives from the Allies nations met in Bretton Woods, New Hampshire, to create what is now known as the Bretton Woods system of International money management.

To simplify, Bretton Woods solidified a method of fixed exchange rates, the U.S. Dollar replaced the Gold Standard, and became ta primary reserve currency, and the creation of 3 international agencies to oversee economic activity- The International Monetary Fund (IMF), the International Bank for Reconstruction and Development and the General Agreement on Tariffs and Trade (GATT).

The most important point of the Bretton Woods system was that the U.S dollar replaced gold as the main standard of international currencies. This also meant that the U.S dollar became the only currency that would be backed by gold (which turned out to be the primary reason why the Bretton Woods System eventually failed).

The 25 years that followed brought numerous problems with this system. By the end of the 19th century U.S gold reserves were so low that the Treasury could not provide enough gold to cover all the U.S dollars that the central banks had in reserve. President Richard Nixon closed the gold window in August of 1971, and refused to exchange U.S dollars for gold. This ultimately ended the Bretton Woods system

The legacy left from the Bretton Woods system still has significance today. Without it, the creation of the three major International agencies would not have existed.