The History of Forex (continued...)

Major Currencies were pegged to the US dollar. These currencies were allowed to fluctuate by one percent on either side of the set standard. When a currency's exchange rate would approach the limit on either side of this standard, the respective central bank would intervene, thus bringing the exchange rate back into the accepted range. In addition to this, the US dollar was pegged to gold at a price of $35 per ounce. Pegging the dollar to gold and the pegging of the other currencies to the dollar brought stability to the world Forex situation.

The Bretton Woods Accord lasted until 1971. Ultimately, it failed but did accomplish what it's charter set out to do, which was to re-establish economic stability in Europe and Japan.

The Beginning of the free-floating system

After the Bretton Woods Accord came the Smithsonian agreement in December of 1971. This agreement was similar to the Bretton Woods Accord but allowed for greater fluctuation band for the currencies. In 1972, the European community tried to move away from their dependency on the dollar. The European Joint Float was established by West Germany, France, Italy, the Netherlands, Belgium and Luxemburg. This agreement was similar to the Bretton Woods Accord, but allowed a greater range of fluctuation in the currency values.

Both agreements made mistakes similar to the Bretton Woods Accord and, by 1973, collapsed. The collapse of the Smithsonian agreement and the European Joint Float in 1973 signified the official switch to the free-floating system. This occurred by default as there were no new agreements to take their place. Governments were now free to peg their currencies, semi-peg or allow them to freely float. In 1978, the free-floating system was officially mandated.

Europe tried, in a final effort to gain independence from the dollar, by creating the European Monetary System in July of 1978. This, like all of the earlier agreements, failed in 1993.

The major currencies today move independently of other currencies. The currencies are traded by anyone who wishes. This has caused a recent influx of speculation by banks, hedge funds, brokerage houses and individuals. Central banks intervene on occasion to move or attempt to move currencies to their desired levels. The underlying factor that drives today's Forex markets, however, is supply and demand. The free-floating system is ideal for today's markets. It will be interesting to see if in the future our planet endures another war similar to those of the early 20th century. If so, how will the Forex markets be impacted? Will the dollar be the safe haven it has been for so many years? Only time will tell.

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