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Chapter 3. The History of Forex (and Why... > Trends That Rocked the Forex World

Trends That Rocked the Forex World

The Rise and Fall of the Modern Gold Standard

The horror and destruction of two world wars filled the minds of the men who gathered in 1944 in Bretton Woods, Vt. They were determined to set the world right again and lay the foundation for a new international economic order. The core of this system was the strict pegging of all western currencies—British pounds, French francs, German marks—to the U.S. dollar. The U.S. dollar in turn was based on a set amount of gold—hence, the modern gold standard.

The Bretton Woods system, however, was fated to ultimately collapse. The reason became starkly clear over time. Banks needed the U.S. dollar, which was pegged to gold, to establish security in their reserve banks. The central banks of Europe could not circulate more money in their own economies if that meant overrunning the number of dollars they held. This system depended, then, on the U.S. running dollar deficits with the rest of the world, and the number of dollars in circulation soon exceeded the amount of gold backing them up.


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