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The History of Forex

The Bretton Woods System 1944 – 1971

The Bretton Woods Accord was established to create a stable environment by which global economies could restore themselves. It attempted this by creating an adjustable pegged foreign exchange market. The US dollar was being pegged to gold, because the US held the most gold reserves in the world at that time. So foreign countries would transact in the US Dollar.

The Beginning of the Free-Floating System

In December of 1971, which was similar but allowed fora greater fluctuation band for the currencies. Under the Smithsonian agreement, other major currencies could fluctuate by 2.25% against the US Dollar, and the US Dollar was pegged to gold.

In 1972, the European community tried to move away from its dependency on the US Dollar. Both agreements made mistakes like the Bretton Woods Accord and in 1973 collapsed. These failures resulted in an official switch to the free-floating system.

The Plaza Accord

In 1985, the G-5, the most powerful economies in the world – US, Great Britain, France, West Germany, and Japan – sent representatives to what was supposed to be a secret meeting at the Plaza Hotel in New York City. News of the meeting leaked, forcing the G-5 to make a statement encouraging the appreciation of non-dollar currencies. This became known as the “Plaza Accord” and its reverberations caused a precipitous fall in the dollar.

Establishment of the Euro

After WWII, Europe forged many treaties designed to bring countries of the region closer together. None were more prolific than the 1992 treaty referred to as the Maastricht Treaty. The treaty established the European Union (EU), led to the creation of the Euro currency, and put together a cohesive whole that included initiatives on foreign policy and security.

Internet Trading

The history of forex markets since 1944 presents a classic example of a free market in action. Competitive forces have created a marketplace with unparalleled liquidity. Individuals trading large amounts now have access to the same electronic communications networks used by international banks and merchants.

Today, the forex market is the largest market in the world.