History of Forex

In July 1944, representatives from 44 countries met in Bretton Woods, New Hampshire to establish an arrangement to monitor the international economy after World War II. The Bretton Woods Agreement was developed due to the arrangement that is mainly designed to promote fair trade and international economic harmony.

In total, 730 delegates from 44 nations met for three weeks in July that year at a hotel resort in Bretton Woods, New Hampshire. The result of this international meeting, the Bretton Woods Agreement, had the original purpose of rebuilding after World War II through a series of currency stabilization programs and infrastructure loans to war-ravaged nations.

Some delegates of The Bretton Woods Agreement in 1944

Bretton Woods had the original intention of smoothing out economic conflict, in recognition of the problems that economic disparity causes. Due to its economic dominance, the United States held the leadership role at Bretton Woods.

Among the organizations that were formed under The Bretton Woods Agreement includes the International Monetary Fund (IMF) and the World Bank. This system worked for 25 years. But it was flawed in its underlying assumptions.

The Bretton Woods Agreement did not include any provisions for creation of reserves. The presumption was that gold production would be sufficient to continue funding growth and that any short term problems could be resolved through the borrowing regimens.

However, the Bretton Woods Agreement lacked any effective mechanism for checking reserve growth. Only gold and the U.S. asset were considered seriously as reserves, but gold production was lagging. Accordingly, dollar reserves had to expand to make up the difference in lagging gold availability, causing a growing U.S. current account deficit.

The Bretton Woods system collapsed, partially due to economic expansion in excess of the gold standard's funding abilities on the part of the United States and other member nations. However, the problems of currency systems not pegged to gold lead to economic problems far worse. However, after Bretton Woods was demolished in 1971, the IMF worked closely with the World Bank and together, these organizations lend funds to developing nations.

After the Bretton Woods Agreement, which managed to change the perception about the U.S. dollar, the Smithsonian Agreement took over. The Smithsonian Agreement, initiated by U.S. President Richard Nixon managed to maintain fixed exchange rates but it was even more shaky and unsound than the gold exchange standard of the 1920s or than Bretton Woods.

It was inevitable that fixed exchange rates, even with wider agreed zones of fluctuation, but lacking a world medium of exchange, were doomed to rapid defeat. This was especially true since American inflation of money and prices, the decline of the dollar, and balance of payments deficits continued unchecked.

The overvaluation of the dollar and the undervaluation of European and Japanese hard money became increasingly evident, the dollar finally broke apart on the world markets in the panic months of February-March 1973.

It became impossible for West Germany, Switzerland, France and the other hard money countries to continue to buy dollars in order to support the dollar at an overvalued rate. In little over a year, the Smithsonian system of fixed exchange rates without gold had smashed apart on the rocks of economic reality.

The fact that depreciating dollars means that American imports are far more expensive, American tourists suffer abroad, and cheap exports are snapped up by foreign countries so rapidly as to raise prices of exports at home (e.g., the American wheat-and-meat price inflation).

The crippling uncertainty of rapid exchange rate fluctuations was brought starkly home to Americans with the rapid plunge of the dollar in foreign exchange markets in July 1973. Methods of regulating the foreign exchange market - such as fixing currency values to a commodity such as gold, or setting maximum exchange rate fluctuations had proven to be too rigid.

After the regulatory mechanisms - such as the gold standard, the Bretton Woods Accord and the Smithsonian Agreement - were no longer in place, the currency market was left with only the forces of supply and demand to guide it.

These conditions led to the Plaza Accord, where on September 22nd 1985, finance ministers and central bank governors from the then G-5 nations - the United States, Japan, West Germany, France and the UK - gathered at the Plaza hotel in New York. In simpler words, the ministers of finance and central bank governors of world leading economies gathered at Plaza Hotel in New York to take some decisions on the international economy.

The result of the gathering was the Plaza Accord, which was implemented on September 22 1985. The Plaza Accord was designed to allow for a controlled decline of the dollar and the appreciation of the main anti-dollar currencies.

The Plaza Accord cemented the role of the central banks in regulating the exchange rate movement. The US persuaded the leaders to coordinate a multilateral intervention, designed to allow for a controlled decline of the dollar and the appreciation of the main anti-dollar currencies.

Each country agreed to make changes in its economic policies and to intervene in currency markets as necessary to bring down the value of the dollar. Not every country fulfilled their agreements however. The US did not follow through on its promise to cut the budget deficit - Japan was badly affected by the dramatic rise in the Yen - its exporters unable to remain competitive overseas.

The impact of the intervention was immediate and within 2 years the Dollar had fallen 46% to the Deutsche Mark (DEM) and 50% to the Yen (JPY). By the end of 1987, the dollar had fallen by 54% against the D-mark and the Yen from its peak in February in 1985. THe US Economy became geared more toward exports, while Germany and Japan increased their imports.

George Soros

George Soros, "The man who broke the bank of England", got the title due to the $10 billion bet that he won against the U.K. pound. George Soros is now the Chairman of Soros Fund Management, LLC and founder of The

Open Society Institute. He was born in Budapest in 1930. He survived the Nazi occupation and then

fled communist Hungary for England, where he graduated from the London School of Economics. He then settled in the United States, where he accumulated a large fortune through the investment advisory firm he founded and managed. Soros is the author of 10 books including most recently, "The Crash of 2008 and What It Means".