Trading in currencies has gone through numerous attempts to control fluctuations in exchange rates, as well as efforts to fix or peg currency values to the price of hard assets like gold.

This article will touch upon some of the key elements in the evolution of the forex market to the modern arena so favorable for currency speculators in the sections below.

Gold Standard Facilitates Acceptance of Paper Currency

Britain is generally credited with discovering that by fixing the value of its printed paper currency, the Pound Sterling, to the price of gold that it could use printed money backed by gold held in reserve to pay off its debts and otherwise engage in international commerce.

After paper currencies issued by nations were first introduced, their exchange rates relative to one another were usually first fixed to the price of gold. Then they were pegged to the value of the U.S. Dollar that had its value fixed to gold.

How the U.S. Dollar Became so Prominent

The only nation involved in World War II that did not suffer significant physical damage with respect to its infrastructure and mainland was the United States.

All other involved nations had to rebuild and this left their economies in considerable disarray. Some countries also paid for the assistance of the United States in the conflict.

During a key conference held at Bretton Woods, New Hampshire shortly before the end of the war in 1944, the bancor was originally proposed as the global reserve currency.

Nevertheless, due to pressure from the United States, the U.S. Dollar eventually became the currency selected and for which gold was made freely convertible at the price of $35 per ounce.

Bretton Woods Agreement Fixes Exchange Rates

After the Bretton Woods agreement, all of the other major currencies then had their exchange rates fixed or pegged to the U.S. Dollar with set ranges of fluctuation permitted.

As a result of the Bretton Woods system of fixed exchange rates, the U.S. Dollar was the most stable currency for many years, until all currencies were allowed to float freely against each other.

This occurred in the early 1970's after U.S. President Richard Nixon unilaterally stopped the convertibility of the U.S. Dollar into gold.

This dramatic event was not only widely credited with ushering in the modern era of floating exchange rates, but also for increasing the growth of speculation in the currencies of most developed nations.

The Modern Era of Floating Exchange Rates

In essence, the system of the gold standard and fixed exchange rates that had overseen a time of considerable prosperity and favorable international trade conditions for many nations of the world was then replaced with a de facto system of floating exchange rates.

Eventually, the current system arose where exchange rates now float freely for most major currencies depending on supply and demand pressures, and no major paper currencies have their values fixed to the price of gold or other hard assets.

In the process, the shift to floating exchange rates spawned today's massive foreign exchange market that now provides ample trading opportunities for forex speculators with its active exchange rate fluctuations and notable trends seen in many currency pairs.

Risk Statement: Trading Foreign Exchange on margin carries a high level of risk and may not be suitable for all investors. The possibility exists that you could lose more than your initial deposit. The high degree of leverage can work against you as well as for you.