The Gold Standard and the Foriegn Exchange

The Gold Standard and the Foriegn Exchange

  • Submitted By: cutesnappy
  • Date Submitted: 01/18/2009 5:51 PM
  • Category: Business
  • Words: 546
  • Page: 3
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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...

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