Bretton Woods Agreement

The Bretton Woods Agreement, was designed to bring stability to bring the money system and to limit speculation in the world currencies.
As an economy strengthened, imports would increase. This action depleted he reserves of gold required to cover the valuation of its money. This caused the money supply to constrict, interest rates would rise and economic activity could slow to the extent of recession – (a period defined by 3 straight fiscal quarters of gross domestic product losses – in which unemployment and low consumer spending are high). Eventually, the prices of goods had to define a bottom and become palatable to other countries. These countries would start buying the currency en masse, injecting the economy with significant amounts of gold, enough to lead to an increase in the money supply. This drove interest rates down and helped to create wealth within the economy.

This was a pattern that was relived over and again through history until the outbreak of World War I practically closed trading routes and the free exchange of gold and silver. This of course was followed by ‘The Great Depression’, which quite arguably was ended by World War II.

After the Second World War, the Bretton Woods Agreement was established., Participating countries agreed to try and maintain the value of their currency with a small margin against the US dollar, economically, the largest country, and a corresponding rate of gold. Governments were not allowed, under the agreement, to devalue their currency in order to bring on an advantage in trade. If absolutely necessary, they were allowed to play with their valuations as long as it did not cause more than a 10% change. Throughout the 1950s, the increase in global trade brought on massive capital transfers created by post-WWII construction. This caused foreign exchange rates under the Bretton Woods agreement to become unstable.

By 1971, the global situation had inevitably caused a move away from Bretton Woods. US President, Richard Nixon had taken the dollar off the gold standard in order to be able to print more money to fund the Vietnam War. This marked a change in government policy in which a debt/credit system was born. By 1973, the currencies of major industrialized nations became free floating, and in part became more subject to the prices set for them in the Forex market. Prices fluctuated each day, with trading volumes and price volatility increasing throughout the 1970s IT was these drastic changes that gave rise to new financial instruments, market liberalization and deregulation.

With the growth in the telecommunication and computer industries in the early 1980’s, the global financial markets surged and the world grew smaller. All markets became accessible to everyone, no matter what time zone, no matter what time of day.

Transactions in the Forex market increased from about $68 billion per day in the early 1980s, to over $3 trillion a day in 2006.