About the Historical Money Exchange
International trade has always been plagued with currency exchange problems. Because very few countries use the same currency, trade partners required a medium of exchange they both could recognize. To solve currency exchange problems, the world underwent a few experimental exchange rate models.
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Gold Standard
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In 1875, most European countries adopted a convention known as the gold standard. Rather than exchanging gold and silver as an international currency, as was historically the practice, each country pledged to tie its domestic currency to a fixed quantity of gold. The gold standard had the effect allowing two different countries to trade using their domestic currencies.
Bretton Woods Accord
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World War II decimated the gold standard. Governments in Europe spent much of their gold reserves fighting WWII. In 1944, France, England and the U.S. met in Bretton Woods, New Hampshire to discuss fixing the post-WWII world economy. They came to the agreement that world currencies would retain a fixed value to the U.S. dollar. Instead of gold as the new reserve, all currencies would be valued against the dollar; the dollar would be tied to a quantity of gold.
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Free-Floating Exchange Rates
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In 1971, the Bretton Woods convention of foreign exchange started to break down. By 1973, sovereign governments were no longer obligated to affix the value of their currency to the U.S. dollar. They could let their currency "float," the process of currency value fluctuations in response to economic conditions, against any other currency they pleased.
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References
- Photo Credit foreign currency image by timur1970 from Fotolia.com
