The foreign exchange market: a history – Part 2December 23rd, 2011
So far we have seen that the foreign exchange market was gradually growing. With the Bretton Woods agreement we saw that the international playing field had recognised the need for a system that could rebuild the international economic system.
After the War, it was established that the USA was the main global economy, accounting for over half of the world’s manufacturing capacity. Therefore it seemed appropriate to tie all of the world’s currencies to the dollar. Other countries had to fix a money exchange rate, and this was done by intervening with the foreign exchange market.
In 1967, the pound was devalued and this was the last blow to the Bretton woods system stability. In the 1960s, the internal US gold reserve was decreasing dramatically from 18 to 11 billion and, at the same time, the external debt of the USA was constantly growing.
In 1970, the interest rates in the USA sharply decreased creating the strongest US dollar crisis. In such a short period of time a great amount of the USA’s capital moved to Europe, where rates of interest were much higher. The prompt fall of the foreign currency used in America (US dollar) drove world leaders to revive the Bretton Woods system with the Smithsonian agreement, but it failed. Other systems attempted to replicate the US system, but had no success. Foreign currency exchange was temporarily closed in Europe and Japan, and the USA declared a devaluation of the US dollar by 10%.
Between 1973 and 1974 the Bretton woods system ceased to exist. In the last few years of its existence, foreign currency traders gained a big profit from speculating on the foreign exchange market which led to the cessation of central bank interventions. It was hard to gain any sort of profit and many big banks suffered damages. Some banks went bankrupt as the damage had hit them hard.
Something had to be done to revive the foreign exchange market. A conference took place in Jamaica, where representatives of the world leading countries met to discuss a new system for world currency. The countries that were present refused to use gold as a means of covering the deficit in international transactions. The new elements of the system would formed by regulating currency relationships and convertibility. The means of payment decided were to be the national currencies of the countries. From that moment on, relationships were formed and started to function interdependently: it was called the system of floating foreign exchange rates.
Today the foreign exchange market sees the world’s major currencies move independently from other currencies. Anyone at all can trade on the foreign currency exchange, usurping the previous ownership of the market by big banks. The underlying factor that drives the foreign exchange market today is supply and demand. Large money exchange companies compete to offer the best foreign exchange services in the industry. If you are looking for a money exchange specialist, contact foreign exchange brokers who can guide you from start to finish of your transaction.
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