A Brief History of Forex

What follows is a brief rundown of some of the major historical developments that have led to the Forex market you are now preparing yourself to trade on.
Bretton Woods 1944. USD Becomes the World’s Reserve Currency. In July 1944, with the Second World War still raging in Europe and South East Asia, 730 representatives from the 44 Allied nations convened at the Mount Washington Hotel in Bretton, New Hampshire, USA, for the United Nations Monetary and Financial Conference. Bretton Woods was an attempt to reach a consensus on how to govern the international economy in the aftermath of the war, as well as to address the isolationist policies of economic discrimination and trade warfare, which many believed had contributed to both World Wars, as well as to the Great Depression. As such, eradicating what had come to be known as “beggar thy neighbour policies” (policies that alleviate a country’s economic woes at the expense of other countries), and encouraging a freer flow of trade between nations, became a focal point for the conference. Essential to the agreement was an international system of payments to facilitate trade with safeguards in place to prevent large fluctuations in currency value or competitive devaluations. For all these reasons Bretton Woods was a major milestone in the development of the foreign exchange market, and indeed the global financial system we have today. It was the first time a comprehensive monetary system had been negotiated between nation states, and even though most of the key points of the Bretton Woods system have since been abandoned, its legacy lives on in the institutions it gave rise to. The agreement that was reached at Bretton Woods on the 22nd of July 1944 led to the creation of the International Monetary Fund (IMF), the International Bank for Reconstruction and Development (now part of the World Bank) and the General Agreement on Tariffs and Trade (GATT). Key to the Bretton Woods agreement was a system of fixed exchange rates between countries whose currency values were all pegged to the U.S dollar, and the US dollar’s convertibility to gold at a fixed rate of $35 dollars per ounce. This effectively made the US dollar the world’s reserve currency as it took on the role that gold had formerly played under the gold standard. In addition to becoming the world’s currency, it’s interchangeability with gold made it the currency with the highest purchasing power. Also, the way other currencies were pegged to it, each with its own fixed rate, meant that the majority of international transactions were denominated in US dollars. Taking into account that in the wake of WWII the European powers most affected by the conflict were also heavily in debt to the United States, the geopolitical and economic climate was absolutely ideal for the rise of the United States as the world’s superpower. While Britain had been the dominant economic force in the 19th and early 20th century, with the sterling taking pride of place as the world’s reserve currency during this period, the second half of the twentieth century would see dominance passing to the United States.

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