Foreign Exchange Market Summary
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INB 205 – International Business
World currencies are the most highly traded item on the global market, and gold is the most sought after and valued metal that always holds its value. Prior to 1931 gold was used as a form of back up for the value of currency. Many nations used gold as the foundation for their currency. However, now world currencies are no longer backed by gold reserves. Currencies are traded globally and now hold their strength in their trading value, yet gold is still a commodity that is traded in its own market. The gold standard was abandoned, first by ...view middle of the document...
For example, one ounce of gold is set at $100 per ounce. This would actually fix the value of the currency. In essence one dollar would be worth 1/100th of an ounce of gold, (Moffat, 2007). This method of solidifying currency gave the impression of an unsinkable note. Also with the gold standard fixed value, inflation was kept in check because printing additional currency needs additional gold as back up. Without the gold the currency is worthless.
Many economists believe the gold standard contributed greatly to the great depression of the 1930’s. Because gold was at fixed rates it did not allow the government to be flexible when the recession occurred, so no hard currency was released,
Commitment to the gold standard prevented Federal Reserve action to expand the
money supply in 1930 and 1931--and forced President Hoover into destructive
attempts at budget-balancing in order to avoid a gold standard-generated run on the
Dollar, (Delong, 1996, p. 1).
Due to the realization how the gold standard contributed and tied the hands of the government, the gold standard was abandon during the great depression, however recovery took years, and maybe World War II actually pulled the United States out of the depression. As of today there are no countries that use the gold standard, yet there are some advocates that believe the gold standard will achieve true monetary stability without runaway printing, “Paper money goes hand-in-hand with the welfare state, the welfare state, the Mexican bailout, and Social Security. It turns the government into a vast counterfeiting operations” (Rockwell, 1996, p. 1). He continues,
The end of gold resulted in the longest and biggest inflation in U.S. history. The
miserable days of 1976 - 1981 may be as forgotten as shag carpet, but we still
suffer the consequences. Those days massively diminished the capital stock, wiped
out savings and pensions, and drove women into the workforce, eventually making
the one-income family a relic.
Even when prices aren't soaring, paper money redistributes wealth in more subtle
ways. Debtors benefit at the expense of savers, government contractors benefit at
the expense of independent businessmen, welfare clients benefit at the expense of
the middle class, (Rockwell, 1996, p. 1).
Rockwell is certain our continual inflation is due to the removal of the gold standard. However the return to the gold standard remains to be seen.
Moffat (2007) says, Nearly every country is on the “fait” system of money. Moffat continues,
"money that is intrinsically useless; is used only as a medium of exchange". We
saw in the article "Why Does Money Have Value" that the value of money is set by
the supply and demand for money and the supply and demand for other goods and
services in the economy. The prices for those...