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The Bretton Woods system came under increasing pressure as national economies moved in different directions during the sixties. A number of realignments kept the system alive for a long time, but eventually Bretton Woods collapsed in the early seventies following president Nixon's suspension of the gold convertibility in August 1971. The dollar was no longer suitable as the sole international currency at a time when it was under severe pressure from increasing US budget and trade deficits.

Pegged and semipegged currencies

In 1971, the Bretton Woods Accord was first tested because of dramatically uncontrollable currency rate fluctuations. This started a chain reaction, and by 1973, the gold standard was abandoned by President Richard Nixon. The fixed-rate system collapsed under heavy market pressures, and currencies finally were allowed to float freely.

The Foreign Exchange market, ("FX or Forex") as we know it today, originated in 1973. However, money has been around in one form or another since the time of Pharaoh. The Babylonians are credited with the first use of paper bills, and receipts. Middle eastern moneychangers were the first currency traders exchanging coins of one culture for another. During the middle ages, the need for another form of currency besides coins emerged as the method of choice.

These paper bills represented transferable third party payments of funds; this made foreign exchange much easier for merchants and traders and caused the regional economies to flourish. From the infantile stages of Forex during the Middle Ages to WWI, the Forex markets were relatively stable and without much speculative activity. After WWI the Forex Markets became very volatile and speculative activity increased ten fold. Speculation in the Forex market was not looked on as favorable by most institutions and the public in general. The Great Depression and the removal of the gold standard in 1931 created a serious lull in Forex activity. From 1931 until 1973, the Forex market went through a series of changes. These changes greatly impacted the global economies at the time. Speculation in the Forex markets during these times was little if any.

The foreign exchange markets officially switched to a free-floating market after the double demise of the Smithsonian Agreement and the European Joint Float. This switch occurred more due to lack of any other available options, but it is important to understand that the free floating of currency was not, by any mean, imposed. This means that countries were free to peg, semipeg, or free-float their currencies.

Pegged: Some smaller economies have attached their currencies to larger economies with which they hold close economic liaisons. For instance, many Caribbean nations, such as Jamaica, have pegged their currencies to the U.S. Dollar.

Semipegged: Semipegged currencies have disappeared since 1993. A perfect example of semipegging would be the currencies of the European Monetary System (EMS). Those currencies only would be allowed to fluctuate within 2.25 percent or, exceptionally, within 6 percent intervention bands. Following the foreign exchange crisis of 1993, the new EMS intervention rates were expanded to 15 percent. Semipegging would have a slowing-down effect on currencies when they were reaching the extreme values allowed within the range. Since 1999, the semipegged currencies of the EMS were switched to fully pegged values that form the Euro.

Free-floating currencies and fixed exchange rates

Free-Floating: When the major currencies are free-floating, such as the U.S. Dollar, they move independently of other currencies. The value of the currency is determined by supply and demand, which has no specific intervention point that has to be observed, and can be traded by anybody so inclined. Free-floating currencies are in the heaviest trading demand.