Foreign Exchange Markets
Shalanda Massenburg
Axia College During the 20th century, the exchange market rates were fixed, according to the amount of gold for which they could be exchanged (Federal Reserve Bank of New York, 2008). The gold exchange standard was adopted by Britain during the nineteenth century. There were a few positive aspects of the gold exchange standard. According to the Federal Reserve Bank of New York (2008), “It served as a common measure of value, it helped keep inflation in check by keeping money supply in the gold exchanged standard economies fairly stable, and long-term planning was easier as rate changes were infrequent”. According to Britannica Encyclopedia (2008), “The gold-exchange standard came into prominence after World War I because of an inadequate supply of gold for reserve purposes”. The United States adopted the gold standard back in 1900. The most recognized reserve currencies were from the United States dollar and the British sterling. Under the gold exchange standard, countries held gold or money as reserves but the United States held reserves just in gold. According to Bordo (2008), “many of the conditions that made the gold standard so successful vanished in 1914”. By 1971, the United States decided to abandon the gold exchange standard. According to Britannica Encyclopedia (2008), “A nation on the gold-exchange standard can keep the currency at parity with gold without maintaining a gold reserve as is required under the gold standard. The gold exchange standard prevented countries from printing too much money. One large negative aspect of the gold exchange standard was the resource cost of producing gold (Bordo, 2008). According to Moffatt (2008), “A gold standard restricts the Federal Reserve from enacting policies which significantly alter the growth of the money supply which in turn limits the inflation