| In 1967, a Chicago bank refused a loan in pound sterling | | | | construction. This destabilized foreign exchange rates |
| £ sought by a college professor by the name of | | | | that had been set up in The Bretton Woods |
| Milton Friedman. He had intended to use the funds to | | | | Agreement. |
| short the British currency. Mr. Friedman had perceived | | | | The Bretton Woods Agreement was finally |
| sterling to be priced too high against the dollar, and | | | | abandoned in 1971, and the gold window was closed |
| wanted to sell the currency, then later buy it back to | | | | on the US dollar. By 1973, currencies of major |
| repay the bank after the currency declined, thus | | | | industrialized nations became more freely floating, |
| pocketing a quick profit. This is what's known as 'Selling | | | | mainly controlled by forces of supply and demand |
| Short'. The bank's refusal to grant the loan was due to | | | | acting in the foreign exchange market. Prices were |
| the Bretton Woods Agreement, established twenty | | | | floated daily, with volumes, speed and price volatility |
| years earlier, which fixed national currencies against | | | | increasing through the 1970s These fluctuations gave |
| the dollar, and set the dollar at a rate of $35 per ounce | | | | rise to new financial instruments, market deregulation |
| of gold. | | | | and trade liberalization. |
| The Bretton Woods Agreement, set up in 1944, aimed | | | | Beginning in the 1980s, international capital movements |
| at installing international monetary stability by preventing | | | | accelerated with the explosion of computer |
| money from fleeing across national borders, and | | | | technology and high speed communications. The world |
| restricting speculation in the world currencies. Prior to | | | | wide markets became virtual 'local market' through |
| the Agreement, the gold exchange standard--prevailing | | | | Asian, European and American time zones. |
| between 1876 and World War I--dominated the | | | | Transactions in FOREX zoomed from about $70 billion |
| international economic system. Under the gold | | | | a day in the 1980s, to more than $1.5 trillion a day two |
| standard, currencies gained a new phase of stability as | | | | decades later. |
| they were backed by the price of gold. It abolished the | | | | THE EUROMARKET |
| arbitrary practice used by kings and dictators of | | | | A major catalyst to the increase in foreign exchange |
| arbitrarily debasing money and triggering inflation. | | | | trading was the rapid development of the Eurodollar |
| But the gold standard wasn't without faults. As an | | | | market, where US dollars are deposited in banks |
| economy strengthened, its imports would heavily | | | | outside the US. Similarly, Euro markets are those |
| increase until it ran down the gold reserves required to | | | | where assets are deposited outside the currency of |
| back its money. This would cause the money supply | | | | origin. |
| to shrink, interest rates would rise and economic | | | | In the 1950s Russia's oil revenues-- all in dollars -- were |
| activity could slow to the extent of recession. | | | | deposited outside the US in fear of being frozen by |
| Eventually, prices of goods had to hit bottom, and | | | | US regulators. This gave rise to a vast offshore pool |
| become attractive to other nations, which would rush | | | | of dollars outside the control of US authorities with the |
| into buying frenzies that injected the economy with | | | | attendant creation of The Eurodollar market. The US |
| gold until it increased its money supply, thus driving | | | | government imposed laws to restrict dollar lending to |
| down interest rates and recreating wealth in the | | | | foreigners. Euro markets were particularly attractive |
| economy. Such boom-bust patterns prevailed | | | | because they had far fewer regulations and offered |
| throughout the gold standard until the outbreak of | | | | higher yields. From the late 1980s onwards, US |
| World War I interrupted trade flows and the free | | | | companies began to borrow offshore, finding Euro |
| movement of gold. This of course was followed by | | | | markets an advantageous center for holding excess |
| 'The Great Depression', which arguably was ended by | | | | liquidity, providing short-term loans and financing imports |
| World War II. | | | | and exports. |
| After the Wars, the Bretton Woods Agreement was | | | | London was the principal offshore market, as it |
| established, whereby participating countries agreed to | | | | remains even now. In the 1980s, it became the key |
| try and maintain the value of their currency with a | | | | center in the Eurodollar market when British banks |
| narrow margin against the dollar and a corresponding | | | | began lending dollars as an alternative to pounds. This |
| rate of gold as needed. Governments were prohibited | | | | allowed them to maintain their leading position in global |
| from devaluing their currencies to their trade | | | | finance. London's convenient geographical (Time Zone) |
| advantage and were only allowed to do so for | | | | location (operating during Asian, Pacific and American |
| changes of less than 10%. Through the 1950s, the | | | | markets) is also instrumental in preserving its |
| ever-expanding volume of world-wide trade led to | | | | dominance in the Euromarket. |
| massive capital transfers generated by post-war | | | | Copyright © C. R. |