In any system it pays to standardize. Essentially this is been the case in every development over the years. We have always tried to find new opportunities in standardizing processes which will improve efficiency.
This can also be seen in the international trade, where people had looked into ways of standardizing the exchange of goods and service. We need to go back to history to see how gold standard worked and what lead to the Bretton Woods system. Much of our worries about raising rupee against dollar dates back to one of greatest move in history by the then President Roosevelt abrogated contracts in which payment was specified in gold.
This system in simple terms made countries to settle their internaional balances in U.S dollars, while the U.S. government redeemed other central banks holdings of dollar for gold at a fixed exchange rate of $35 per ounce. This system came to an end when U.S government was no longer able to redeem dollar for gold in 1971.
Now another question emerges as we probe further into the currency maintained by a country. How will the country decide on their currency?. What should be the growth rate of the currency?. What should be the quantity of the currency?
Gold standard served two purpose, one the domestic standard trying to determine the currency quantity and the rate of growth of money supply. This worked in tandem with the world's gold stock.
Next Gold also provided a standard for the international exchange. Consider the scenario in which U.S fixed the price of gold at $20 per ounce, and the U.K government fixed it at £4 per ounce, then the exhcnage rate equalled $5 per pound. This is called as the fixed exchange regime.
After 1971, we have the floating exchange rate. This works in a simple rule that the central bank of a country will not intervene in the rates set by the market. Hence the demand for a particular currency helps in determining the rates. This demand is because of the larger acceptance of the goods and services of a particular country.
Lets understand the rules of the floating exchange rates more and its interaction with the interest rates and inflation in the subsequent articles.
This can also be seen in the international trade, where people had looked into ways of standardizing the exchange of goods and service. We need to go back to history to see how gold standard worked and what lead to the Bretton Woods system. Much of our worries about raising rupee against dollar dates back to one of greatest move in history by the then President Roosevelt abrogated contracts in which payment was specified in gold.
This system in simple terms made countries to settle their internaional balances in U.S dollars, while the U.S. government redeemed other central banks holdings of dollar for gold at a fixed exchange rate of $35 per ounce. This system came to an end when U.S government was no longer able to redeem dollar for gold in 1971.
Now another question emerges as we probe further into the currency maintained by a country. How will the country decide on their currency?. What should be the growth rate of the currency?. What should be the quantity of the currency?
Gold standard served two purpose, one the domestic standard trying to determine the currency quantity and the rate of growth of money supply. This worked in tandem with the world's gold stock.
Next Gold also provided a standard for the international exchange. Consider the scenario in which U.S fixed the price of gold at $20 per ounce, and the U.K government fixed it at £4 per ounce, then the exhcnage rate equalled $5 per pound. This is called as the fixed exchange regime.
After 1971, we have the floating exchange rate. This works in a simple rule that the central bank of a country will not intervene in the rates set by the market. Hence the demand for a particular currency helps in determining the rates. This demand is because of the larger acceptance of the goods and services of a particular country.
Lets understand the rules of the floating exchange rates more and its interaction with the interest rates and inflation in the subsequent articles.
Posts
No comments:
Post a Comment