November 1973 was quite a month. President Nixon, just weeks from his impeachment, insisted to a press conference of 400 journalists that he was not a crook. Meanwhile, the Yom Kippur war and the OAPEC oil embargo that followed had triggered an energy crisis. As Henry Kissinger took his ‘shuttle diplomacy’ across the Middle East, the UK government – already mired in labour disputes across the coal and electricity sectors – was forced to declare a state of emergency. It wasn’t all doom and gloom though: an estimated half a billion people watched the wedding of Princess Anne and Mark Phillips; ‘Last of the Summer Wine’ debuted with the now near-unintelligible episode title ‘Short Back and Palais Glide’; and David Cassidy topped the UK charts with ‘The Puppy Song’.
With that sort of competition, it is perhaps little wonder that the inaugural meeting of the London Foreign Exchange Joint Standing Committee (or ‘FXJSC’ for short), on 30 November 1973, passed many by. As it turned out, the half century that followed was to be anything but quiet in the world of foreign exchange. In my remarks today, I want to sketch three of the most profound changes in FX markets over that period, of greatest interest to central banks: the role of currencies in macroeconomic frameworks; the huge diversification in the range of market participants, and the trading and settlement technologies they use; and the evolving toolkit needed to maintain safety, soundness and financial stability.
The role of currencies in macroeconomic frameworks
The FXJSC was forged against the backdrop of the collapse of the Bretton Woods system, in which the major currencies fixed to the dollar, which in turn fixed to gold. The system operated effectively for a quarter century after World War 2, but ballooning deficit spending to fund the Vietnam War made defence of the gold peg increasingly untenable for the US authorities. In August 1971, President Nixon unilaterally suspended convertibility. Heroic efforts to recalibrate the system, via the Smithsonian Agreement, were abandoned by Spring 1973.