Foreign Exchange Market Summary Finance Essay - Free Essay Example

The proceeding textual work summaries both the fundamentals and mechanisms of the gold standard, and highlights the functions of the worlds major foreign exchange markets. The foreign exchange market is a global entity. The foreign exchange market (FOREX) is dissimilar to a market like the Hong Kong Stock Exchange, the New York Stock Exchange, and the Australian Securities Exchange, where trades of stock are conducted in centralized locations. In the FOREX market major international banks that participate in currency trading for risk-seeking investors who do not mind engaging in speculation. Currency is bought, sold, and traded (swapped) through the foreign exchange market. The exchange rate is determined independently by each bank yet will essentially is determined by the driver of supply and demand. Employing two rudimentary systems to establish the exchange rate between nations, the floating exchange rate system (free-floating and managed-floating), and the fixed exchange rate system, the foreign exchange market may be described as a market where the value of one nations currency is converted to another national monetary equivalent. Under the fixed exchange rate system, the exchange rate converts one countrys currency into anothers anchored in a pre-established fixed rate established by a countrys government and cannot be altered because of change occurring in a private market or with regard to supply and demand for that currency. The floating exchange rate is the exchange rate for transferring one nations currency value into another nations currency, and governed by the supply and demand for that currency in a private market operated by international banks. Because this form of exchange is dependent upon current exchange rates (values and variables), the rate of exchange does not always prove to be a profitable move. Moreover, values may be appreciative or depreciative. For instance, the dollar appreciates with respect to the yen if the yen to dollar exchange rate rises and conversely, the dollar depreciates if the yen to dollar exchange falls. Monetary exchanges that transpire over the telephone or via other electronic util ity are termed, over-the-counter. Spot exchanges occur instantaneously. On December 22, 1717, Sir Isaac Newton, master of the English mint, established the price of gold at 3 pounds, 17 shillings, 10.5 pence per ounce. England was then on the gold standard and stood willing to convert gold to currency, or vice versa, until World War I, except during the Napoleonic Wars. During that period, London was the dominant center of international finance. It has been estimated that more than 90 percent of world trade was financed in London.(Ball, et al., p.147, 2006) Akin to Sir Isaac Newtons ideals, each country set a certain number of units of its currency per ounce of gold, and the comparison of the numbers of units per ounce from country to country was the exchange rate between any two currencies on the gold standard. The gold standard is the recognized benchmark to which currency is calculated in relation to its gold equality value and where currency is exchangeable for a specific amount of gold. Since, the gold standard was espoused by the bulk of industria lized or trading countries. Under this standard, paper or coin currency may be exchanged for its equal value in gold. Essentially, individuals were permitted to exchange cash or coins for pure gold. Due in part to this open exchange for gold, governments were to maintain gold reserves of adequate proportion to satisfy these gold exchanges. While the majority of worldly nation held dollars, pounds, or gold in their reserve, the United Kingdom and the United States held the needed gold in reserve. With regard to the gold standard, World War I and the Great Depression signaled eras of dramatic change. In 1933, when President Franklin D. Roosevelt outlawed private gold ownership (except for the purposes of personal adornment (jewelry), the gold standard effectively evaporated in the United States of America. Officially, the U.S. went off the gold standard in 1971. Until recent years, the gold standard was all but abandoned. Advocates, like Jacques Rueff, hold that the gold standard as a form of international monetary is quite practical. Why? The monetary purchasing powers of nations operate independently, free from government and political policy influence. Under this system no one country, despite size, economic status, or BOP can produce more currency than its reserve worth. In other words, under this advantageous system of control, the gold standard limits the power of governments to regulate the price of inflation by production of excessive currency; forming an effective mea ns of evading inflation and unemployment. Advocates also edify that gold is an asset that is superior to any form of world currency. Additionally, and importantly in a world of international trade, no government, be it foreign or domestic is able to produce currency that is not recognized under the statues of the gold standard. Likewise, the gold standard system prevents any nation from expanding its supply of currency in efforts to compensate for its debts. The international gold standard system is one of tender, whereas exchange rates are at fixed priced and a system in which exchange rates between countries are at the fixed level. If the rates rise or fall the gold standard rate would be fixed shifting gold from one nation to another nation. This generates certainty for international trades and affords the luxury of exchange rate patternization. Yet, the gold standard is interlaced with its share of negative characteristics. The largest negativity or downplaying attribute is the simple fact that countries without any or little gold are at a competitive economic disadvantage. Separately however, this drawback is an advantage to the United States the second largest gold mining nation in arrears of South Africa. The largest part of gold mining within the U.S. transpires on federally owned domain, and the grounds in Nevada being the principal source for domestic gold. Second, without an expanded money supply, the economy may stagnate. Obviously, if gold denominations are minted again; individuals will perpetrate acts of gold hoarding, removing gold from circulation. In sharp contrast to what proponents claim, those in opposition to a gold standard believe that nations would be incapable of protecting from a disaster occurring in another nation, exemplary in the case of a depression. Also, as is true with all commodities and most utilities like petroleum, gold market price fluctuates; and therefore does not possess a fixed rate suitable for currency exchange. Others find the observation that there is an inadequate supply of available gold to permit economic verve and continued growth. Last and most important of all for all who live here is that should the world opt to change to an international gold standard, at present rates, the U.S. does not even have an adequate amount of on-hand gold to reimburse its debt owed to foreign investors. Perhaps a desirable solution, which both the advocate and opponent would find comfort in is that an absolute and universal value be placed upon gold; paving way for a gold standard in the truest sense, standard never fluctuating. No, thats has been tried before by the Gold Pool.