The Way the Exchange rate System is Introduced from the Gold standard

0 63
Avatar for Tana388
1 year ago

There is disagreement among economists as to whether the devaluation of the currency is negative or positive. The matter is also relative according to the country. It is not possible to give a final decision in one word. According to modern monetary policy, 'devaluation' means the devaluation of a country's currency against a country's currency in a fixed exchange rate system. However, with the change of time and financial system, the type and nature of devaluation is changing. If you want to talk about this change, you have to go back to the old days. We have to deal with the history of the financial system.

Before the introduction of currency, only exchange was required for transactions. The present work of money was done by exchanging goods with each other. The need for a monetary system over time. At first it became popular in metal products such as copper, iron and silver coins. In the sixth or fifth century BC, the Lydian people of the Asian continent of Turkey made the first coins. Coins were minted and circulated in ancient India around the time of the Lydian coinage. It is believed that coins were introduced here about two and a half thousand years ago. However, around 3000 BC, the Sumerians used the first coins to sell barley. However, after the coin comes the paper coin. Paper coins or notes were introduced in China, During the reign of Tang (618-906). After that paper notes started circulating slowly. The first paper note was first proposed in 1890 in the Massachusetts Bay Colony in the United States. The first dollar was printed in 180 and it was accepted by all.

The role of gold and silver in today's financial system is not so direct. However, history shows that until the third decade of the twentieth century, a direct link between gold and paper money was established in the monetary system. The developed countries of the world had confidence in gold. Currency supply control and currency valuation became dependent on gold. Today I will tell that story.

Gold standard

From 180 to 1914 was the golden age of the gold standard. In this system, the economically powerful countries express the value of their currency as a certain amount of gold. The gold standard system is a lot like that - it is written in the current money, I will be obliged to pay that much money to the bearer as soon as the demand arises. The gold standard is the basis of the monetary system. It can be said that if there was a promise in the 500 taka note, I would be obliged to give 29 grams of gold to the bearer of the demand. Something like this. The important thing about this system is that in this system the central bank could not print notes if it wanted to. The countries that introduced the gold standard system legislated the value of their national currency equal to that of gold. Such as: one pound, one dollar, How much gold could be exchanged for one German mark was determined by the laws of those countries. In this system, there was not much chance of exchange rate or exchange rate of different countries' currencies. During the Pure Gold Standard period, provision was made to keep 100% gold reserve against paper currency. The next step in the monetary system is called the Gold Bullion Standard.

Gold Bullion Standard

The Gold Standard system came to an end in World War I Damadol. The stability of the exchange rate is lost. Great Britain, however, wants to return to pre-war gold. It was their efforts that led to the introduction of the Gold Bullion Standard in 1925. In this system, the provision of keeping gold reserves against the current notes was removed. As a result, the Bank of England gained more freedom to issue notes. However, this arrangement did not last long. England withdrew from this system in 1931.

Gold Exchange Standard

After World War I, the demand for money increased, but the problem was that gold reserves did not increase. Now when it comes to issuing notes, Gold must be in stock. In this situation most European countries change the law. They allow gold as well as other currencies of gold to be kept in reserve form. In this system, there is no obligation to pay the value of notes issued by the central bank in gold or to buy and sell gold coins and gold to the public. However, unlike all these notes, the Central Bank Gold Exchange or Bill of Exchange, Responsible for issuing drafts or checks. This arrangement continues without any compromise at the international level. The problem started when many countries started printing notes without depositing enough gold to boost economic growth and employment. By 1928, 25 countries had so-called gold exchanges, especially the pound, holding only 42% of their reserves against their notes. However, when the global recession started at that time, Great Britain also felt the heat. Britain loses the ability to pay gold against the pound sterling. As panic spread across European countries, they were eager to convert their deposits into pound sterling gold. They demanded gold against the pound from the Bank of England. However, it was not possible for the Bank of England to meet this demand. In 1931, Great Britain abandoned the Gold Standard due to all these complications. By 1933, only five countries, France, Switzerland, Holland, Belgium and Italy maintain this system. However, it could not last long. This system was abolished in 1936 due to the devaluation of the currency. However, it returned in another form in 1986 through the historic Breton Woods system.

The Bretton Woods System

Source: https://blog.fintelligents.com/bretton-woods-agreement/

It is an economic conference held on July 1, 1944 in Bretton Woods, New Hampshire, United Kingdom. It was attended by representatives of 44 Allied countries at war. The main objectives of the Bretton Woods system were to introduce a stable exchange rate system, to end the foreign exchange regulation system, to reintroduce the convertibility of all currencies and to end the competition for currency devaluation at home. There was not much room for devaluation in the Bretton Woods system. Member countries will be able to borrow from the fund to solve the problem. However, by reforming monetary and fiscal policy, they will manage the economy in such a way that the root causes of the problem are removed and the balance of payments is restored. The International Monetary Fund (IMF) was established to oversee the Bretton Woods system.

World War II can be described as a turning point in foreign exchange and currency markets. World War II ends the Gold Standard, a variety of currencies. After the war, international transactions began with the IMF-introduced par value system. And the era of floating rates began in the early seventies. In fact, with the expansion of international trade came the expansion of the foreign exchange market. The exchange rate of the world currency market is now constantly changing, freeing itself from the shackles of gold and the International Monetary Fund. Sometimes it is economic instability, sometimes it is geopolitical change.

Sources:

2
$ 1.01
$ 1.01 from @TheRandomRewarder
Sponsors of Tana388
empty
empty
empty
Avatar for Tana388
1 year ago

Comments