In theory, foreign exchange dates back to ancient times, when traders first
began exchanging coins from different countries and groups. However, the
foreign exchange industry itself is the newest of the financial markets.
In the last hundred years, the foreign exchange market has undergone
some dramatic transformations. In 1944, the postwar foreign exchange sys-
tem was established as a result of a multination conference held at Bretton
Woods, New Hampshire. That system remained intact until the early 1970s.
At this conference, representatives from 45 nations met together to dis-
cuss the future exchange system. The conference resulted in the formation
of the International Monetary Fund (IMF). It also produced an agreement
that fixed currencies in an exchange-rate system would tolerate 1 percent
currency fluctuations to gold values, or to the U.S. dollar, which was estab-
lished previously as the “gold standard.” The system of connecting the cur-
rency’s value to gold or the U.S. dollar was called pegging.
In 1971, the Bretton Woods Accord was first tested because of dramati-
cally uncontrollable currency rate fluctuations. This started a chain reaction,
and by 1973, the gold standard was abandoned by President Richard M.
Nixon. The fixed-rate system collapsed under heavy market pressures, and
currencies finally were allowed to float freely. Thereafter, the FOREX quickly
established itself as the financial market, the world’s largest financial market.
