Gold Standard

One of the most important events in the history of the foreign exchange market took place in 1975 and it was the beginning of the Gold Standard. Up until then, nations would use gold and silver as a method of international payment, but the problem associated with that was that their value was affected by the external demand and supply.

The main idea behind the Gold Standard was that a currency would be supported by gold; however, governments needed large amounts of gold reserved in order to meet the demand for currency exchanges. Through the 19^th century, all the major economic countries had named an amount of currency to an ounce of gold. In addition, the difference in price of an ounce of gold between two currencies has turned out to be the exchange rate for those currencies, establishing the first standardized method of currency exchange in history.

Moreover, due to the political strain between Germany and the major European countries during the World War 1, the Gold Standard broke down, as there was not enough gold to exchange for all the currency that governments were printing off. This issue led most of the countries to spare the standard gold again by the beginning of World War 2.

Methods of exchanging goods and services have been around since the beginning of humankind. As decades passed by, the foreign exchange industry went through a series of changes that affected the global economies, going from the removal of the gold standard during the Great Depression to what we know today. This modern form of the foreign exchange market was implemented during the year 1973.

Let’s take things from the beginning…

Bretton Woods Accord

Just before the World War 2 (1944), representatives from the allied nations (U.S, Great Britain and France) reach to a conclusion that there was a need to set up a monetary system. These representatives got together at Bretton Woods, New Hampshire, in order to establish the policy of attaching currencies against the U.S Dollar.

The Bretton Woods System was actually established to fix exchange rates for major currencies and additionally led to the shaping of three international organisations, the International Monetary Fund (IMF), the International Bank for Reconstruction and Development, and the General Agreement on Tariffs and Trade (GATT). Moreover, the US Dollar replaced the Gold Standard to become a primary reserve currency and also to be the only currency that would be backed up by gold.

However, the years to come found the U.S having to deal with a series of balance payment deficits, trying to hold the position of the world’s major currency. In the early 1970’s, the U.S went short of gold reserves and did not have enough gold to cover up all the U.S Dollars that foreign central banks had in reserve.

Finally, on the 15th of August 1971, U.S President Nixon announced that the world would no longer exchange gold for the U.S Dollars and this event marked the end of Bretton Woods’s era.