Dec 4, 2010


Money, in one form or another, has been used by man for centuries. At first it was mainly Gold or Silver coins. Goods were traded against other goods or against gold. So, the price of gold became a reference point. But as the trading of goods grew between nations, moving quantities of gold around places to settle payments of trade became cumbersome, risky and time consuming. Therefore, a system was sought by which the payment of trades could be settled in the seller’s local currency. But how much of buyer’s local currency should be equal to the seller’s local currency?

The answer was simple. The strength of a country’s currency depended on the amount of gold reserves the country maintained. So, if country A’s gold reserves are double the gold reserves of country B, country A’s currency will be twice in value when exchanged with the currency of country B. This became to be known as The Gold Standard. Around 1880, The Gold Standard was accepted and used worldwide. 
During the first WORLD WAR, in order to fulfill the enormous financing needs, paper money was created in quantities that far exceeded the gold reserves. The currencies lost their standard parities and caused a gross distortion in the country’s standing in terms of its foreign liabilities and assets. 

After the end of the second WORLD WAR the western allied powers attempted to solve the problem at the Bretton Woods Conference in New Hampshire in 1944. In the first three weeks of July 1944, delegates from 45 nations gathered at the United Nations Monetary and Financial Conference in Bretton Woods, New Hampshire. The delegates met to discuss the postwar recovery of Europe as well as a number of monetary issues, such as unstable exchange rates and protectionist trade policies.During the 1930s, many of the world’s major economies had unstable currency exchange rates.A recovery of Europe in the hopes of avoiding the problems that arose after the First World War.The delegates at Bretton Woods reached an agreement known as the Bretton Woods Agreement to establish a postwar international monetary system of convertible currencies, fixed exchange rates and free trade. To facilitate these objectives, the agreement created two international institutions: the International Monetary Fund (IMF) and the International Bank for Reconstruction and Development (the World Bank). The intention was to provide economic aid for reconstruction of postwar Europe. An initial loan of $250 million to France in 1947 was the World Bank’s first act. Under the Bretton Woods Exchange System, the currencies of participating nations could be converted into the US dollar at a fixed rate, and foreign central banks could convert the US dollar into gold at a fixed rate. In other words, the US dollar replaced the then dominant British Pound and the parities of the world’s leading currencies were pegged against the US Dollar

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