Foreign Exchange MarketsJoin now to read essay Foreign Exchange MarketsForeign Exchange Markets SummaryGerald MaurerAxia College of University of PhoenixIntroductionIn this paper I will write a lecture that explains the gold standard. I will address the functioning of the world’s major foreign exchange markets. I will discuss in detail the positive and negative aspects of using the gold standard. This paper will also talk how currency fluctuates.
The U.S. dollar has been the dominant currency in the world’s transactions since the end of World War II in 1945. The U.S. dollar was dominant because the U.S. economy emerged from the war virtually undamaged and was clearly the most powerful in the world at that time. Over the next few decades Japan, and other countries in Western Europe and across the world had begun to develop powerful economies, and their currencies were being used along with the U.S. dollar.
Americans enjoyed a world where the U.S. Dollar was the main currency of exchange and stability throughout the last half of the Twentieth Century. As the first decade of the Twenty-first Century now draws to a close, however, a shock may be in store for Americans. The U.S. Dollar may no longer be the main currency of exchange in the world and may no longer be such a desired currency to hold.
How and why a currency increases or decreases in value, the effects of such changes, and the resulting effects on a nation and the world are very important matters to consider. Money, although often thought of as only a medium of exchange, has a value of it own and, as such, is also a commodity, in the same way oil, gold, silver, or corn are commodities (Feiler, Schilling).
The price of money as a commodity is often determined or set as a result of government action and international trade which is observed and then used to determine a value. Such value determination is done by the foreign exchange markets of the world. It is because of such markets that international trade and business can function smoothly or at all (Feiler, Schilling). Foreign exchange trades can occur in a stock market like exchange, similar to the Chicago Board of Trade. Normally, however, it is the major banks in each major nation, such as the Bank of London, the Federal Reserve Bank of New York, and the Bank of Tokyo, which help exchange one currency for another and also, through their purchases of currency “reserves” help set the “price” of all currencies.
The Federal Reserve System also helps fund the Federal Reserve. The price of real estate, other real goods and service (including consumer staples, energy and transportation), currency, commodities, the Internet, food, telecommunications and the Internet are all managed largely by the Federal Reserve System.
The Federal Reserve System also creates, maintains and enhances individual government agencies. This means that there are often multiple agency budgets. To simplify, agencies often have a central bank or central plan to ensure that the federal government’s budget isn’t too out of sync with the Federal Reserve System. This information can also help explain government action. For instance, a group of U.S. senators and chief executives of the Federal Reserve System would like the Federal Reserve to be able to issue government bonds that could help them secure their jobs. The Federal Reserve’s budget was not set by the United States Senate, who might then consider other ways to help.
The Federal Reserve Bank of New York is a public or private bank that controls a small fraction of the total world budget. It has a central bank, which is generally led by Chief Economist, Andrew Norgate. Norgate oversees the global interest rate in the Federal Reserve System. The $3 billion in outstanding reserves was the primary source of funding funding.
In 2005 and 2006, the Federal Reserve System used its entire $13.8 billion reserves to build its first reserve of 10,000 million tons. The Fed Reserve had over 70 percent of its assets under management, based on that ratio, it sold more than 40 trillion dollars over the past five years. That total amount amounted to about $100 billion per year, making it the highest annual reserve of any country in the world. The total amount of government debt was $35 billion.
The Federal Reserve issued and created the United States Monetary System in 1931. In 1936 the government began the process of increasing its borrowing ability and the interest that was accrued on Treasury note money. The United States government began to print paper money which had a higher rate of savings and was able to lend to businesses through the government’s credit unions. In 1937 the government created the Federal Reserve Bank, which had been the second largest dollar-denominated reserve bank of the world.
Bank of New York Mellon is a U.S.-based bank that operates primarily in the state of Rhode Island. The bank’s policy is to lend money to U.S. firms who work on behalf of the public. Other banks in the system include Citigroup, Credit Suisse, Lloyds Banking Holdings, Goldman Sachs and Bankers Trust Company of New York, but they all have their own accounts. Each member of the United States Senate’s Permanent Subcommittee on Financial Services, the Subcommittee on Banking and Commodity Management and the Subcommittee on Financial Institutions, as well as the Federal Reserve System itself, is appointed by the president. All major U.S. financial institutions are federally owned. The banks on the United States Fed’s main lines of business are
This system where the prices of currencies are allowed to fluctuate is a “floating exchange rate” system (FRB New York). This floating system, although it may seem to make sense given how common international trade has become in the modern world, was not the standard used until the very last decades of the Twentieth Century (FRB New York). Prior to the floating exchange rate system the world used the “gold standard” (FRB New York). Under the gold standard nations’ central banks would determine the value of their currency based on how many ounces of gold each one unit of their currency could purchase.
Other nations did the same, so that all currencies had a value that could be compared against a common denominator – gold. Because gold could be held and seen and its value has been known for centuries, a currency exchange set up with gold as its base could be trusted by members of all nations who knew that if they arrived at the Bank of London with U.S. Dollars they would receive British pounds in an amount equal to how many ounces of gold such U.S. Dollars could acquire in England.
This gold standard system was not only stable but it also had the trust of all nations’ citizens. Gold has had a long history of value and its value is very easy for average citizens to understand and trust (van Eeden). When all currencies are expressed as a measure of gold people and businesses were more likely to conduct international trade because they could trust that payment would be made in a form that had value and properly compensated them (FRB New York). The use of a gold standard also helped currencies remain fairly constant in value as re-pricing of currencies, against gold, was rarely done (FRB New York). However, there were problems with the gold standard as time passed.
First, gold costs money to produce, which the gold standard did not account for. This fact meant that every time a nation produced gold or bought it, it was spending more to acquire it or store it then it was using to value its currency. The end of the gold standard, however, came about because the gold standard became too difficult to maintain (FRB New York). For example, as the United States began to import more and more goods from abroad, foreign holdings of U.S. Dollars caused great concern