Traders centuries ago often exchanged goods and services with other countries that utilized a different currency than there own, because of this a form of a currency exchange program has been in existence for an extremely long time. After all, what good does it do to come home with a form of money that nobody will accept? We will discuss the evolution of trading currencies from its root to the present time. In addition, trading in gold will be mention as well as the Bretton Woods Agreement.

Gold Exchange and its Interaction with the Bretton Woods Accord:

In 1967 an individual attempted to short the British Pound by taking out a loan from a United States bank. Instead of in taking out the loan in US dollars he attempted to have it done in British Pound Sterling. The bank did not make the loan due to the wording of the accord called Bretton Woods.

The purpose of the pact was to help stop gambling that a currency would increase or decrease in value. Previous to this, currencies were backed up by a national governments holding of gold as a reserve. This practice provided confidence to the public, since they knew they could exchange there money for gold at any time.

But, it was a very inefficient economically maintaining such large amounts of assets not producing any economic benefit for society. In addition, it limited federal government's ability to expand the money supply and provide an economic stimulus to the country.

This governmental policy had server consequences on a nation's economy causing it to have wild swings between prosperity and recession. This would happen when countries gold reserves would decrease as it imported products that needed to be paid for with gold. Since the currency of a country was backed by the gold it held, as the gold reserves decreased so did the supply of money in the economy. This would have a negative effect on the prices of other commodities such as; corn, oil and sugar.

As these prices dropped other countries would then start buying them in massive amounts which were paid for in gold. Thus the gold reserves would increase and the money supply would follow. The effect on interest rates would be to decrease them and the economy would come out of the depressed period and start performing better. This pattern was continually repeated until World War One began and the trade between decreased due to logistical problems.

Due to the economic might of the United States after World War Two the US dollar increased in value verse the currencies of the European nations. Countries where not permitted to devalue there currencies over ten percent in an attempt to improve there economies through exports. Obviously, many nations have not adhered to this agreement; one only needs to look at China as an example of extreme currency manipulation in an effort to improve exports to the determent of there trading partners.

The Bretton Woods Accord was initiated after World War Two in an attempt to provide order and standardize the international currency markets. The principle reason for this was to maintain the value of a particular currency with in a narrow range, thus bringing a since of balance to the market as the countries could then exchange goods and have advanced knowledge of what value they would receive in return for there goods or services.

In 1971 the United States announced that a US dollar could no longer be exchanged for gold. This process freed up the worlds currency and permitted them to float on a free market and have there value determined by what investors where willing to pay for them.

The amount of funds being traded daily has increased significantly over the decades. From the billions in the 80's to the trillions today. The volume, speed and volatility of the markets has also increased rapidly with improved technology and the popularity of the internet.

The EURO Dollar Market Takes Off Like A Rocket:


This explosion was initially started by the Russians selling oil to the rest of the world and receiving US currency in exchange for there oil. Since Russia was afraid of a potential conflict with the United States they started depositing there US dollars in banks outside of the control of the US government. When this happened huge amounts of US dollars where now in banks outside of the US.

Because of this the US government enacted laws restricting lending to non US citizens. Then a strange thing happened, US based companies realized there were sizeable amounts of US dollars outside of the US that they could borrow at very favorable rates, in fact they were much more competitive than the interest rates they were presently able to get from a US bank.

In the 1980's British banks began lending US dollars and because of this they have remained the number one market for US dollars outside of the US. In addition, because of there liberal laws and geographical location many countries around the world utilize London as a principle source of financing and Forex exchange.