Many of you are probably thinking “what is the gold standard?” If so, I am here to define the gold standard for you and inform you about the functions of the world's major foreign exchange markets. First I will begin by explaining the use of the gold standard then we will take a look at the ways the foreign exchange markets function in the world today.
The gold standard is a monetary system in which the standard economic unit of account is a fixed weight of gold. The standard is currently used for private currency. Since 1976, the U.S. government no longer uses gold to set the value of a dollar. Gold coins have not been minted as legal currency since 1933. Although, in 1986 the U.S. Mint began to issue gold coins for collectors in four dominations: $5, $10, $20, and $50. In 1971, the world entered for the fist time in history the point in which no circulating paper anymore is redeemable for gold.
World War I changed everything by taking away the trust between the trading companies as establishing the U.S. as the head of producing the gold. This led into bigger problems involving the gold then ever before and before you knew it, that was an end to that.
Many of you might be thinking “why gold?” Well, there are many reasons why. Gold is durable and easily recognizable which eliminate the fear of counterfeit. Also, gold is easy to store, portable, divisible, and easily standardized. Gold also ensures through the operation of the competitive market a tendency toward price stability in the long run.
An advantage of the gold standard is that the exchange rate could not fluctuate beyond the “gold points” which was about three cents above or below the mint parity. The gold standard was known to create certainty in international trade by providing a fixed pattern of exchange rates. It prevents the government from inflating the currency which is a real advantage for us.
One of the main problems with using the gold standard was that a country that was not competitive in the world's marketplace would lose more and more gold since they would import more goods but export less. Overall, the country's economy would be terribly hurt. Mining and minting gold was and still is a costly activity and once the government realized paper money would do the job, out goes the expensive gold. Another negative using the gold standard is that the value of the dollar is extremely volatile. The world stopped using the gold standard because of all of the problems it encountered during the Great Depression. During the Great Depression, many banks failed causing millions of people to lose everything they had. The value of gold is very unstable and is a risk our economy cannot risk taking a chance on anymore.
The foreign exchange market acts as an active trading forum for currency exchanges to take place in the marketplace. Those who participate in the market look to exchange their currency to a more valuable form. The trading continues to make money from the currency that is traded. The exchange rate is determined by the supply and demand which are influenced by the market's current conditions. It's main functions are to accommodate and determine an exchange rate. An exchange rate is essential for an economy due to the potential of economic growth that resides with exports and imports. International trade, foreign investment, the demand for a country's dollar, and employment are factors needing an exchange rate which allows all of the above to positively influence the economy.
Nowadays, gold has soared in cost up to over $600 an ounce. Now gold is not a matter of currency but it has became an investment for many people.
Cornelius, L. (2000). Trading in the global currency markets. Retrieved January 27th, 2008, from http://www.forex-trader.com/Introduction-to-Forex.htm
Greaves, B. (1995). How to return to the gold standard. Retrieved January 27th, 2008, from http://www.fee.org/publications/the-freeman/article.asp?aid=4848
Helfield, N. (2003). The meaning of money: its purposes and functions. Retrieved January 27th, 2008, from http://www.gold eagle.com/editorials_03/helfield022803.html
Paul David