In the past, the value of goods and services was expressed in terms of other goods. This exchange system was called the barter system. The first coins to be used as a medium of exchange were gold and silver. Later, in the Middle Ages, people began to use paper money to exchange value as an IOU. However, the foreign exchange industry itself is the newest of the financial markets. Over the past century, the foreign exchange market has undergone dramatic transformations. Before the First World War (WW1), central banks supported their currencies through convertibility into gold. Paper money could be converted to gold on request at the bank. Since it was unlikely that all paper money holders would ask for gold at the same time, banks only needed to keep a specified amount of gold on hand in order to process normal foreign exchange requests (reserves of ‘gold). And so, the amount of money in circulation has been increased compared to the amount of real gold that the bank has in hand. Therefore, in times of crisis, when confidence in the financial system was low, banks experienced a “bank rush”. It was at this time that a large number of currency holders requested conversion to gold at the same time, especially if it was more gold than the bank had. In 1944, exchange control was introduced to control the forces of supply and demand, with the intention of structuring the world economic system so as to stabilize the volatile foreign exchange markets. And so in July 1944, towards the end of the Second World War, the allied countries (United States, Great Britain and France) met at the United Nations Monetary and Financial Conference held in Bretton Woods, New Hampshire and established the post-war exchange system. The Bretton Woods conference determined a currency peg system and created the International Monetary Fund. The Accord sets the US dollar at $35 per ounce of gold and fixes other currencies at the dollar. During the 1960s, the volatility between the economies of different countries became more extreme, making it difficult for some to maintain the system of attachment. Bretton Woods’ control system collapsed in 1971, when President Nixon suspended.

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