Ok, so far, we’ve described what “forex” means and we have compared the forex market to more popular stock market. Today we’re going talk about the history of the forex market.
The origins of the forex market date back to 1944, when The United Nations Monetary Fund convened in Bretton Woods, New Hampshire to devise a plan for stabilizing the world economy.
The British Pound had been, up until World War II, the monetary unit of choice when comparing the relative value of foreign currencies. However, Hitler’s regime managed to devalue the Pound by way of a massive counterfeiting scheme. Something had to be done quickly in order to avert a worldwide economic depression.
Out of this meeting came the “Bretton Woods Accord”. This new policy implemented the Gold Standard, tying the value the U.S. Dollar to the price of one ounce of gold ($35.00 per ounce at the time). It was further agreed that the Dollar would replace the British Pound as the benchmark “currency of exchange”. All other currencies were aligned to the Dollar, and a ‘fixed exchange rate” of ± 1% was established.
In other words, a foreign currency could fluctuate a maximum of 1% higher or lower than the Dollar. Any fluctuations beyond this limit required that the ‘offending’ nation’s central bank step in to correct the imbalance.
The Bretton Woods accord remained in effect until 1971, when it was determined that the U.S. dollar could no longer hold steady relative to gold. At this time, the ‘fixed exchange rate’ model was abandoned in favor of the ‘floating exchange rate’ we still use today.
Tomorrow we’ll deal how you as an individual forex trader fit into the scheme of things.
William
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