WW II -The Bretton Woods Agreement

To protect their local national interests, the colonial powers had already increasingly introduced foreign exchange controls world wide. These were designed to prevent market forces from leading to monetary irresponsibility. In particular during the latter stages of WW II, the Western Powers met on July 1944, at Bretton Woods (New Hams hire) to finalize ‘The Bretton Woods Agreement’. Rejecting John Maynard Keynes suggestion for a new world reserve currency in favor of a system built on the US dollar; they agreed to introduce a system of fixed exchange rates, permanently fixing the US dollar at USD35/oz of gold ,while also fixing the rates of the other main currencies to the dollar.

The stated intent being to structure a world economic system that would stabilize the volatility in the foreign exchange markets that had occurred previously. The countries which signed the treaty agreed to maintain the domestic currency to US dollar exchange rate, along with the necessity to maintain the corresponding ratio of the gold. They were also prohibited from depreciating the currency value to gain trade benefit, and only allowed no more then 1% fluctuation from pegged rates.

Other international institutions such as the IMF, the World Bank and GATT were created in the same period as the emerging victors of WWII searched for a way to impose monetary discipline on the world’s financial institutions. All currency speculation was effectively finished. The foreign exchange Market became the sole domain of governmental institutions operating under the agency of central banks.