The Gold Standard and The Foreign Exchange Market
The gold standard was a way to set fixed rates on many nations
currency in terms of gold. This would allow currency to be traded freely
and converted to gold. The gold standard was first mentioned by Sir Isaac
Newton in December 1717 when he established the price of gold. (Bell,
p.147)). Sir Isaac Newton however did not fully adopt the gold standard
until 1819. The United States was leery at first but finally jumped on
board with the gold standard in 1834. (Bordo, 1999-2002). The United
States was able to fix the gold rate at $20.67 per ounce for nearly 100
years from 1834-1933. During this time several major countries joined the
gold standard and in 1914 this was a time of astonishing economical rise.
(Bordo, 1999-2002. By law of the gold standard no government is allowed
to make currency that can not be exchanged for gold. The reasoning
behind this law is to prohibit unwanted inflation. The gold standard is
supposed to be used as a reserve asset to many nations. If countries are out
there making currency that is not exchangeable for gold than this will
cause the country to lose economically since their currency is useless
outside their country. The gold standard began to die out during World
War I when financial burdens forced Britain to sell most of their gold.
(Bell, p. 147). The only way the gold standard is going to work effectively
is if the greater nations come together and make an agreement on a fixed
rate of currency. In 1944 several representatives of major nations met at
Bretton Woods and established the plan for the World Ban, and the gold
exchange standard. (Bell, p. 147). Bretton...