The Foreign Exchange Market

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Recommended: An essay on the benefits of the gold standard

Before the times of the foreign exchange market, the world depended on the gold standard to determine the value of goods and services. This paper will describe in more detail the gold standard, the positive and negative aspects of using the gold standard and in addition the paper will summarize the major functions of the world’s major foreign exchange markets.

The gold standard was a monetary system that many countries used in order to determine the value of domestic currencies in relation to a specific amount of gold. The value of money, bank deposit and notes were transformed into gold at the specific amount. Britain was the first country to adopt the gold standard in 1816, followed by the United States. From 1834 until 1933 the specified price of gold in the United States was $20.67 per ounce (Bordo, 2002). However, in 1933 U.S. President Franklin D. Roosevelt put an end to the gold standard when he prohibited the possession of gold by any persons except for the purposes of owning or manufacturing jewelry (Moffatt, 2008). This was the beginning of the Bretton Woods System. Under the Bretton Woods System, countries agreed to settle their international balances by converting deficits into U.S. dollars at a flat exchange rate of $35 per ounce (Bordo, 2002). This monetary system only lasted until 1971 when President Richard Nixon completely ended the trading of gold (Moffatt, 2008). Since that time the gold standard has not been used by any major economies.

The most important benefit of using the gold standard was that it insured a low level of inflation. According to Michael Bordo (2002), “Whatever other problems there were with the gold standard, persistent inflation was not one of them. Between 1880 and 1914, the period when...

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... exchanges (Forex Capital, 2000). The exchange rate influences decisions that are made by businesses and the people who choose to participate in the transactions. This is a very important aspect of foreign exchange because it also influences the prices of the economy, consumer prices, interest rates, the growth of economies and investment decisions.

References

Bordo, Michael D., (2002). Gold Standard. The Concise Encyclopedia of Economics. Library of Economics and Liberty. Retrieved September 28, 2008 from http://www.econlib.org/library/Enc/GoldStandard.html

Forex Capital Management., (2000). Introduction to Foreign Exchange. Retrieved September 23, 2008, from http://www.forexcapital.com/introfx.htm

Moffatt, Mike. (2008). Gold Standard vs. Fiat Money. About.com Economics. Retrieved September 23, 2008, from http://economics.about.com/cs/money/a/gold_standard_2.htm

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