Foreign Exchange Rate
The history of the International Monetary System begins with the Gold Standard in 1876-1913. During this time, countries set par value for their currency in terms for gold. A gold standard is the system of fixed exchange rates in which the value of currencies was fixed relative to the value of gold and gold was used as the primary reserve asset. (Colander) This era came to be known as the gold standard and gained acceptance in Western Europe in the 1870s. The United States adopted the gold standard in 1879. The gold standard had a simple set of “rules of the game”, and worked until the outbreak of World War I. Because governments agreed to buy and sell gold on demand with any country at the value of each currency in terms of gold, also referred to as the fixed parity rate, the exchange rates were stable. Consequently, countries had to maintain adequate reserves of gold in order for this regime to function. Then, with the outbreak of World War I, trade flows were interrupted. Free movement of gold was also interrupted, and major nations were forced to suspend operation of the gold standard. During World War I currencies were able to fluctuate in terms of gold and each other. Supply and de
Today, countries pursue certain exchange rate regimes. The regimes are based on equality and countries would prefer fixed exchange rates. Fixed rates provide stability in international prices for the conduct of trade. Fixed rates are inherently anti-inflammatory, requiring the country to follow restrictive monetary and fiscal policies. Fixed exchange rates are inherently anti-inflationary requiring the country to follow restrictive monetary fiscal policies. These rate regimes insist that central banks maintain large quantities of international reserves for use in occasional defense of a fixed rate. Once these rates are in place they may be maintained at rates that are inconsistent with economic fundamentals. The increased volatility of exchange rates is one of the main economic developments of the past forty years. Although volatile exchange rates increase risk, they also create profit opportunities for firms and investors. Again, the exchange rate is the price of one country’s currency in terms of another currency. The system, or regime, is classified as a fixed, floating, or managed exchange rate regime. If the government does not interfere in the valuation of its currency, the currency is classified as floating or flexible. The Spot Exchange Rate is the quoted price for foreign exchange to be delivered at once, or in two days for interbank transactions. Devaluation of a currency refers to when the par value is reduced. The opposite of devaluation is revaluation. Weakening, deterioration, or depreciation of a currency refers to the drop in value of a floating currency. The opposite of depreciation is appreciation. Emerging markets countries must often choose between two extreme exchange rate regimes, either free
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War II,
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Approximate Word count = 1177
Approximate Pages = 5 (250 words per page double spaced)
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