The
Bretton Woods Accord The
first major transformation, the Bretton Woods Accord, occurred toward the end
of World War II. The United States, Great Britain and France met at the United
Nations' Monetary and Financial Conference in Bretton Woods, New Hampshire to
design a new economic order. This location in the U.S. was chosen because, at
the time, was the only country unscathed by war. Most of the European countries
were in shambles. Up until WWII, Great Britain and the British Pound had been
the major currencies by which most currencies were compared. This changed when
the Nazi campaign against Britain included a major counterfeiting effort against
its currency. In fact, WWII vaulted the US dollar from a has been currency after
the stock market crash of 1929 to the benchmark by which most currencies were
compared. The Bretton Woods Accord was established to create a stable environment
by which global economies could re-establish themselves. The Bretton Woods Accord
established the pegging of currencies and the International Monetary Fund ("IMF")
in hopes of stabilizing the global economic situation. 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. |
