Foreign Exchange Currency Markets - Essay Example

rd was established with the aid and support of economic giants of the time such as America, Great Britain, France and other nations which supported the idea of stability through linking their currency with gold. The gold standard became firmly entrenched in the international economic environment after the Second World War when the Bretton Woods system was created. The Bretton Woods system gave rules and established regulations for the commercial and fiscal exchanges between the nations which had emerged victorious after the war.

The purpose of establishing such a system was to strengthen and rebuilt those economic systems that had collapsed after the war. As discussed by Bird (1994), the system depended heavily on the regulations provided by the International Monetary Fund (IMF) and the International Bank for Reconstruction and Development. The basic feature of the Bretton Woods system was an agreement made by each nation that their monetary policies and fiscal agendas would maintain the currency value of the country near a preset value in terms of gold.

The IMF had the authority to handle and settle payment imbalances between various nations and had the responsibility to monitor the fiscal activities various countries. Thus the term gold standard was used for the system which worked quite well for many years until it collapsed in 1971 when America pulled out of the gold standard (Bird, 1994). Even before the American pullout, the fundamentals of the gold standard had already weakened. The monetary interdependence of nations which came about after the second world war when international trade become very important allowed banks and even large companies to transfer huge amounts of capital from one location to the other (Cooper & Sneddon, 2001).

Currency Speculators could convert large sums of money from a weak to a strong currency in the hope for the currency to gain value if it was so adjusted by the government. If the speculation was incorrect, the money could