The general function of the worlds foreign markets are to determine the exchange rate based on the basic principles of supply and demand. The exchange rate is necessary for the economy due to projected growth with imports and exports. In this paper I will discuss how the worlds major foreign exchange markets functions. Also I will touch on the principles of the gold standard.
Some factors that needs an exchange rate that is a positive influence on an economy is the international trade, the demand for that countrys dollar through exporting firms in the same country, foreign investment and employment. Currency is one of the most important factors in trade. The value of money is different in practically every country. Currency decreases and increases in certain parts of the world which effects the changes of value on certain goods. The currency value is determined by the purchasers of the currency. Most of the purchasers are travelers, foreign exchange traders and the government. The price at which the willing buyer and seller come to an agreement is the fair market value. There are approximately one hundred and eighty different currencies in the world that are all based on certain factors. The U. S. dollar is the most dominant currency in the worlds transactions. We have World War II to thank for that. War is one of the most important factors to consider when setting the value of currency. Conflicts and war with other countries shows strength, stability, and the value of its currency.
The gold standard is best described as the commitment with participating countries to set the prices of their domestic currency in terms of specific amount of gold. Although is may be thought of as only a medium of exchange and may have value of its own, money is also thought of as a commodity. Other commodities such as silver, oil and gold can be determined by government action. As a commodity, the price of money is mostly determined by the current international trade and actions of the government. The gold standard marks the amount of what the currency will value that equals the specific value of gold. In essence the gold standard equation is the amount of currency = the specific amt of gold. This is the simplest form to describe how the gold standard is applied to the amount of money.
Many may not know that the foreign exchange trade can be traced back to the ancient Egyptian days. Some of the earliest stages of trade was during the time of the the coinage stage was introduced in biblical time. The Middle East used gold and silver as a form of trade that dates back as far as 100,000 years ago. Some exchange shells as money. Shells were the fist means of exchange or money. Cowry shells served as money through history up to the middle of this century. Metals such as gold or silver was traded in the form of nuggets or powder. Around 560 B.C. , banks gave receipts to those who deposited one of the two that was traded for whatever amount the bank held after the deposit. Soon those receipts later were traded as money, instead of strictly the customers and bank, thus the paper money was bought into existence.
It wasnt until around 1817 that England made gold of value. So the value of such element was determined by the amount of ounces of gold thus starting the gold standard. This process helped to eventually prevent currency inflation. The official standard of gold was placed in effect by the start of the 1900s. The United States trade system was conducted mostly on the gold standard although very little silver was being traded. The Gold Standard Act under President William McKinley passed in 1900 acknowledged gold as the only standard for redeeming paper money although silver was allowed previously as an exchange for gold. In 1933 the Gold Standard Act was ended when President Franklin D. Roosevelt prohibited private gold ownership, with the exception of jewelery. The Bretton Woods System created in 1946 created exchange at certain rates that allowed the government to gold to the U. S. Treasury at a fixed price. Unfortunately the system ended August 15, 1971 when trading gold at a fixed amount was cut off by President Richard Nixon. At that time the amount of gold was $35 per ounce. Since that time the gold standard has not been used for any major economy.
Now in days, almost every country, including the United States has a system of fiat money. Fiat money is paper money that is declared legal tender per the government. Most people like myself was curious as to what fiat meant. Fiat is Latin that means ???let it be done???. This type of tender can be used to pay taxes and all debts. It is also used among merchant, businesses and consumers to buy goods and services. The US dollar is considered a fiat currency with is the most widely held reserve currency. Some examples of other widely held currencies are Yen, Euro and Pound Sterling.
The Bretton Woods system later was used in the mid 20th century. This system was the first example of a monetary order that was intended to govern monetary relations among the independent states. This system was eventually abandoned due to there was not enough gold to cover all of the paper money that was in circulation. The federal reserve somehow lost track of the money printed versus the amount of gold available. There was far too much money printed than gold available to exchange for which devalued the paper money. After the declined of the Bretton Woods agreement, the U. S. currency was not able to be converted into gold but other currencies instead.
Although we currently use the fiat system as a means of exchange, the gold standard could have prevented inflation in the long run.
* Russell, M. (2007, February 25). How are Currency Values Determined. Retrieved September 8, 2009, from http://ezinearticles.com
* Montgomery Rollins (1907). Money and Investments. Dana Estes & Company. http://www.archive.org/stream/moneyinvestments00rolliala/moneyinvestments00rolliala_djvu.txt. “Fiat Money. Money which a government declares shall be accepted as legal tender at its face value
* Jones, Nick (2007). “Fiat Currency: Using the Past to See into the Future”. The Daily Reckoning – Agora Financial.