Exchange rate history

1800^th century

Back dating into the 18^th century, the earliest forms of forex markets can be traded for the gold standard use error. In this  period, gold was taken to be widely accepted form of exchange and as such for transaction to take place, the local currencies of the various  countries has to be converted into gold first their back into the other country. As a consequence, the Central Bank of all the participating had to have reserves of gold and be ready at any time to sell or buy gold from the traders. However, this system was not as smooth as anticipated  earlier due to the scarcity of gold and the convertibility of gold into the various currencies. Other methods had to be determined.

1914 – 1944

The use of the gold standard was suspended during World War I thus leading to the collapse of the forex market. However, at the end of the war, 1920, a few countries tried to revive the use of the gold standard to no avail due to the great depression of the 1930’s. As a result, the countries had to rethink their strategies in approaching the exchange rates market conundrum. Thus plans were put in place to revise the gold standard but were abandoned due to the inevitably of war in 1938. Any plans for a change in exchange rate had to be put on hold until the end of the second word war in 1944 since all international trade had been suspended during the period.

1944 – 1971

In the advent of the second world war, a meeting was held in Bretton Wood, USA where an agreement known as the Breton Wood Agreement  was that the USA  dollar was taken up to be the reserve currency and as such was used as the reference point for exchange rates with other currencies. All the other currencies had first to be converted into US dollar before being converted into another currency of choice. To make the process easier, the prices of all the other currencies against the dollar were unilaterally determined with 1% threshold movement of exchange rate below or abuse the fixed exchange rate. Any greater changes than the set 1% between the US dollar and other currencies had to be unanimously agreed upon by all the member states. Out of the resolution, a great burden of ensuring that there was enough supply of US dollar reserves was passed on the American government. As such, the country could not make any extreme changes in its policies that would affect other nations.

Another outcomes of the meeting was the formation of the Bretton Wood institutions, The World Bank, The GATT (World Trade Organization and the International Monetary Fund (IMF).

All these institutions were organized in streaming lining the market for smooth transactions between different countries. This system came to an end when the supply for US dollars exceeded the demand and as such a new agreement had to be put in place.

After 1971

An agreement was put in place to allow for exchange rates to be solely, determined by forces of demand and supply. As such the floating/flexible exchange rate regime was born. This was greatly hailed due to the fact that it was automatically attained. This system allows for greater levels of liquidity as well as automatically sorting out problems of balance of payments (BOP). However, the major problem associated with this system is the fact that it is susceptible to attacks by speculators making it practically impossible for business planning.