Foreign Exchange Markets Summary
Gold standard was in the monetary system of many countries for many years. Gold standard can be defined as the mode of exchange of paper notes. These paper notes are easily exchangeable with the fixed amount of gold. It has always been the purpose of a government to formalize a policy which could provide money creation profit and can be used in the time of emergencies. Gold standard overtook the gold coin system from 17th to 19th century. We can define Gold standard as a pledge put forward by participating countries to fix the prices of their domestic currencies in stipulations of the gold.
This means that if a country sets the price of an ounce of gold to around $100, then the price of $1 dollar will be around 1/100th of that gold. Gold standard is not a current standard of country now. In fact all of the countries have changed their standard to flat currency standard, where the value of the money is not dependent upon the gold. Gold standard had many drawbacks in its implementation. It is fact that if US had continued its policies under gold standard it would have really cost them the capability to adjust its economic policies.
It is also fact that the Great Depression prolonged so long because of at that time the gold was used as monetary standard. Countries which switched to other standards suffered very less from Great Depression. Also by using gold standard, the burden of the adjustment that has to take place in order to create a homogenous effect around is always on the country having weak currency. During the periods of recession, the affected countries see a downfall in their economies and are made to increase unemployment. However, by using gold standard the one advantage that can be considered of great value is the absence of inflation.
If the price of the gold remains fix in every country then the inflation will be minimum unless there is a big economical change. Flat currency standard was initialized in United States in 1970s. This change provided other countries to follow there mode for the exchange as well, causing countries to enter into this monetary system quickly. We can see that now gold standard might be working as a secondary or less secondary mode of monetary fund but the flat currency is followed by all the countries. Flat currency standard is based on the idea that the money is useless, and it is used as the only mode of exchange.
Flat currency moves along with the supply and demand principle. The significance of the money is set according to the supply at one place and demand in the other. This supply and demand of money causes the supply and demand of the goods and consequently the effects on the economy take place. All the stock exchange markets run on the flat currency standards. The biggest of these stock markets reside in New York, London, Tokyo and Singapore. The main way of trading is to buy one currency in return of another country’s currency. That’s how business in the world moves and various economical changes take place.
The value of each currency is determined from various aspects including geographical, political, domestic structure and proposed stability of that country. By using these facts the currency of one country gains value or becomes devalue. This exchange involves big companies, central banks and governments who are responsible for keeping their currency stable. Money, in the flat currency standard, is considered to be only a mode of exchange. But it still has some value like oil, gold or any other metal. The price of this money is often determined or set according to supply and demand which is observed in the market.
This kind of determination is done by the central banks of each participating nation. And these banks perform the exchange of the currency. Using this way, the currency system is allowed to fluctuate more randomly. This can be considered the drawback of the flat currency standard where the fluctuation can cause serious consequences to one country’s economy but other countries still are saved. This never would have happened in gold standard system, but then there wouldn’t have been so much progress economically around the world.
The supply and demand principle works very well for a longer period of time. Inflation can take place but still the fluctuation causes the business and economy to grow. References Van Eeden, P. (2005). The History of Money. Retrieved May 24, 2008, from http://www. kitco. com/weekly/paulvaneeden/nov182005. html Tirole, Jean. (2002). Financial Crises, Liquidity, and the International Monetary System. New York: Princeton University Press. Del Mar, Alexander. (2000). History of Monetary Systems. New York: University Press of the Pacific.