Gold Standard Foreign Exchange Market

Gold Standard Foreign Exchange Market

The gold standard is a monetary system in which the standard economic unit of account is a fixed weight of gold. With the gold standard, the United States economy would print currency that equaled a specific value of gold. Meaning, you could cash in your money for a specified amount of gold because a unit of currency equals a specific amount of gold. As stated in chapter 5 of International business, 10th edition, “the gold exchange standard, established at Bretton Woods after World War II, worked until the 1970’s when it collapsed due to inflation and the surplus of U.S. dollars held outside the United States.”

They used gold because its rarity, durability, and the general ease of identification through its unique color, weight, ductility and acoustic properties. Gold is an internationally recognized commodity, which is why there are still holdings of gold. Gold has held its high standard and people use it for jewelry, coinage and other purposes.

When Bretton-Woods was abandoned in the 1970's, market forces of supply and demand controlled exchange rates. The main characteristic of this period was an extreme precariousness, which led to market deregulation, open trade and a rise in speculators. The advent of computerized transactions has led to the main business of the exchange being speculation in the futures of different currencies, rather than the buying and selling of goods.

This lead to the Foreign Exchange Market. The Foreign Exchange Market (FOREX) is the largest market in terms of the value of cash traded, with an average daily value that is greater than $1.9 trillion. The FOREX market (Foreign Exchange market) is not limited to any one country or time of operation. FOREX market as an inter-bank market that took shape in 1971 when global trade shifted from fixed exchange rates to floating ones. This is a set of transactions among FOREX market agents involving exchange of specified sums of money in a currency unit of any given nation for currency of another nation at an agreed rate as of any specified date. During exchange, the exchange rate of one currency to another currency is determined simply: by supply and demand вЂ" exchange to which both parties agree.

The FOREX market is open 24/7, in all the major financial centers of the world. Trade in foreign currencies is how values are established for the commodities and manufactured goods that are traded between nations. Creditors and borrowers settle obligations such as bank drafts, bills of exchange and letters of credit by exchanging different currencies at agreed upon rates. These rates change constantly.

The 10 most active traders in international currencies account for 73% of all market business. These traders are large international banks that repeatedly make available the market with both buy and sell prices, which establish the bid - ask spread. Interest rates, global trade, inflation and political events affect currency prices. Due to the over-the-counter or easily obtained methods of trade in currencies, there is no single rate for each currency. Rather the values depend on which bank or market maker is trading. This made the markets more competitive. The most traded currencies are the U.S. dollar, the Euro dollar, the Japanese Yen, the British pound sterling, the Swiss franc, the Australian dollar and the Canadian dollar. The base currency in a trade is the U.S. dollar, Euro dollar and the Japanese Yen. The cross-rate is the trade of two non-U.S. Dollar currencies. First, one is traded against the U.S. dollar, and then the U.S. dollar is traded against the second. This helps with the flow of trade currencies to move equally among the trading players. The major players in currency trading are: governments and central banks; banks and investment banks; hedge funds; businesses; consumers; and major investors and independent investors. The rules of trading are highly unfavorable to retail investors, because large minimum position sizes force small traders to take risky large positions. Lack of experience and small amounts of capital make private investors in currencies a high-risk endeavor for these traders. Smaller retailers would most likely be ruined in these types of transactions because of the lack of knowledge and playing power when it comes to trading in a high risk format and are usually discourage to partake in these high risk trading.

The limitations to Governments were that they could not spend what they wanted because the amount of currency in circulation had to correspond to the amount of gold in reserve. President Nixon eliminated the gold standard in 1971. It was eliminated because the governments could not manipulate the money supply if it was tied