The history of currency change
THE EVOLUTION OF EXCHANGE MARKETS.

·· The gold exchange and the Bretton Woods agreement. Read
·· The explosion of the Euromarket. Read

The gold exchange and the Bretton Woods agreement

In 1967, a bank in Chicago did not grant Milton Friedman, a university teacher, a loan in British pounds because he had intentions of using the funds to produce scarcity of the British pound. Friedman, who had noticed that the British pound had a price that was too high compared to the U.S. dollar, wanted to sell the currency and then, after its price decreased, buy it again to reimburse the bank, thus obtaining a short term profit. The bank's declination to provide Friedman with the funds was due to the Bretton Woods agreement, established 20 years before, which fixes the country currencies with respect to the U.S. dollar, each ounce of gold being worth $35 USD.

The Bretton Woods agreement, established in 1944, was aimed at achieving a monetary international stability, by avoiding money leaks between nations, and restricting speculation on currencies all over the world. Before this agreement, the gold exchange pattern, which prevailed between 1876 and the First World War, dominated the international economic system. Under this gold exchange market, currencies won a new phase of stability because they were backed by the price of gold. This abolished the ancestral practice used by kings and governors of arbitrarily reducing the value of money which produced inflation.

But the gold market was not flawless. As economies became more robust, importation of assets and goods reached a level at which gold reserves were insufficient. As a result, monetary mass started declining, interest rates increased, and economic activity decreased until a final recession point was reached. In the long term, market prices would reach their lowest point, and in this way became attractive to other nations which rushed to buy and thus restored monetary mass, decreased interest rates and created economic wealth again. These fluctuations prevailed during the gold market period until the beginning of the First World War when commerce fluctuations and movement of gold were interrupted.

After the War, the Bretton Woods agreement was celebrated, in which the participant countries agreed to try and maintain the value of their currencies within a narrow margin of the U. S. dollar, and corresponding gold rate. Countries were prohibited to devaluate their currencies to benefit commerce, and they were only permitted to do so for devaluations of less than 10%. In the 50's, the international commercial volume was in constant expansion and caused massive movements of capital generated by the construction industry after the War. This produced instability in the change types as established in Bretton Woods.

The Agreement was finally abandoned in 1971, and the U.S. dollar would no longer be exchangeable in gold. In 1973, the currencies of the most important industrialized nations started floating with more liberty, controlled mainly by the offer and demand forces acting in the exchange market. Prices were fixed daily to a free change type, with an increase in their volumes, velocity and volatility during the 70's. This gave place to new financial instruments, market deregulation and liberalization.

In the 80's, the movement of capital across country borders was accelerated with the arrival of computers and technology, thus extending market continuity through Asia, Europe and America time zones. Asset transactions shot up from $70 thousand million a day in the mid 80's, to more than $1.5 billion a day two decades later.