The History of FX: Part 2
Manipulation in the markets?
Though it came on the heels of the Great Depression and the beginning of the end of World War II, the Bretton Woods system addressed the global economic catastrophes that began as early as the First World War, when governments (including the U.S.) began controlling imports and exports to offset wartime blockades. This resulted in the manipulation of currencies to ”assist” foreign trade. These currency “wars” and restrictive market practices helped spark the devaluation, deflation and depression that defined the economy of the 1930’s.
The Bretton Woods Conference.
In the summer of 1943 John Maynard Keynes, then the world’s most famous economist and head of Britain’s delegation, and Harry Dexter White, a key member of the US contingent, had begun formulating the basis for the conference that would last three weeks.
Over 700 delegates from 44 Allied countries assembled at The Mount Washington Hotel in Bretton Woods, New Hampshire, USA in July 1944 to put in place a new international financial system.
In an effort to free international trade and fund post-war reconstruction the delegates, and their member states, agreed to fix their exchange rates by tying (pegging) their currencies to USD. American politicians had assured the rest of the world that its currency was stable by linking USD to gold where 1 USD equalled 35 oz. of bullion. The member nations also agreed to buy and sell USD to keep their currencies within 1% of the fixed rate.
The IMF and World Bank are born.
The conference also resulted in the creation of the International Monetary Fund (IMF) and the International Bank for Reconstruction and Development (IBRD) – now the World Bank. The IMF was developed to monitor exchange rates and lend reserve currencies to nations with trade deficits, the IBRD was created to provide underdeveloped nations with needed capital — although each institution’s role has changed over time. Each of the 44 nations who joined the discussions contributed a membership fee to fund these institutions; the amount of each contribution designated a country’s economic ability and dictated its number of votes.
USD is worth how much?
During the existence of the Bretton Woods System the USD was fixed (for the most part) where 1 USD equalled:
• 4.20 German Marks
• 0.35714 British Pounds
• 0.89286 Australian Dollars
• 360 Japanese Yen
• 4.37295 Swiss Francs
• 625 Italian Lire
• 4.9371 French Francs
The Bretton Woods system collapsed in 1971, when President Richard Nixon severed the link between USD and gold. In 1971 Fort Knox (the US Gold Repository) contained only a third of the gold bullion necessary to cover the amount of dollars in foreign hands so Nixon was attempting to avert a run on USD. By 1973, most major world economies had allowed their currencies to float freely against USD. It was a rocky transition, characterized by plummeting stock prices, skyrocketing oil prices, bank failures and inflation.