The History of The Forex Market

The Bretton-Woods Agreement which originated in 1944, fixed national currencies against the US dollar, and set the dollar at a rate of USD 35 per ounce of gold. In 1967, a Chicago bank refused to make a loan in pound sterling to a college professor named Milton Friedman, because he was planning to use the funds to short the British currency. The bank's refusal to grant the loan was due to the Bretton-Woods Agreement

The Bretton-Woods Agreement was created after World War II, in order to stabilize and regulate the international Forex market. Participating countries agreed to try to maintain the value of their currency within a narrow margin against the dollar and an equivalent rate of gold.

The dollar gained a premium position as a reference currency, reflecting the shift in global economic dominance from Europe to the United States.
Countries were barred from devaluing their currencies to benefit export markets, and were only allowed to devalue their currencies by amounts less than 10%. Post-war construction during the 1950s, however, required great volumes of Forex trading as masses of capital were required. This had a destabilizing effect on the exchange rates that were established in Bretton-Woods.

In 1971, the agreement was scrapped when the US dollar ceased to be exchangeable for gold. By 1973, the forces of supply and demand were in control of the currencies of major industrialized nations, and currency now moved more freely across borders. Prices were floated daily, with volumes, speed and price volatility all increasing throughout the 1970s. New financial instruments, market deregulation and trade liberalization emerged, further stoking growth of Forex markets.

The explosion of computer technology that began in the 1980s accelerated the pace by extending the market continuum for cross-border capital movements through Asian, European and American time zones. Transactions in foreign exchange increased rapidly from nearly $70 billion a day in the 1980s, to more than $2 trillion a day 20 years later.

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