Fixed Economy vs Floating Economy

Topics: Foreign exchange market, United States dollar, Bretton Woods system Pages: 5 (1786 words) Published: November 29, 2010
Chris Rudy
Issue analysis

The global economy has expanded exponentially since the beginning of the 20th century. A very important issue that has come to develop in the last thirty years is the global economy more or less abandoned a fixed currency system and using the modern floating currency/exchange model in an attempt to regulate markets in the newly developed foreign market economy. But what effects, both positive and negative have there been in the adoption of a floating model compared to a fixed model? Is the global economy better off or worse off by this implementation? To really be able to analyze the issue it is important to know the background of this switch from a fixed to floating currency system, who are the big players in the floating currency system, the challenges or benefits that this system provides and what needs to be done to correct problems arising out of the use of floating currencies.

To understand why the world uses a floating currency it is important to understand the history behind the issue. After World War II the leaders of the world’s industrialized nations met at a hotel in Bretton Woods, New Hampshire (Mingst 2008) and established a fixed currency rate that these industrialized nations would adhere to. There are a couple of reasons why the delegates that met at this time wanted a fixed international monetary system: one, the global depression was fresh on all the delegates’ minds, believing that a fixed currency rate would not only prohibit another global depression but as well be establishing global economic security; and two, the established international economic security would also provide a strong foundation for world peace (Hudson 2003). The fixed rate they agreed on would be set on a gold standard of 35 US dollars per ounce. that would have to be met by plus or minus one percent. The idea was that the gold standard would be adhered to easily by the developed, industrialized nations, and that the established bretton woods institutions such as the IMF would then be able to help lesser developed countries in helping their currencies live up to the international standard by giving the countries short term loans to decrease the deficit in the gap of their currency (Hudson 2003). This exchange rate regime lasted the better part of forty years until the early 1970’s when the United States took away the ability away for the dollar to be converted into gold. It was not soon after that other countries followed suit, which in effect made the US dollar the reserve currency of the global economy. As a result in modern times, the currencies that are the most traded on the global market place are not the pegged or fixed currencies of the past but are floating or flocculating currencies which allow a national currency to fluctuate instead on the foreign exchange market (Galvo and Rienhart 2002).

Now that the background of the issue of floating currencies has been addressed, who are the key players in this economic regime of floating currency? The key players in this system are the countries whose currencies are exchanged the most on the international system, as well as various Intergovernmental Organizations. The currencies that are most traded in the international economic community are the US dollar comprising 71% of forex trade, the Euro consisting of about 41%, the Great Britain Pound at 18% and the Japanese Yen at around 16%. Seeing that most trade is done in the US dollar, and that the reserve currency is also the US dollar, the United States the biggest player of the four on the field that is the global marketplace. This virtually makes all countries with the biggest trade surpluses, such as China, to have to buy US dollars. This is important because, from lecture, it is known that the fed does indeed buy up US dollars when it seems the value will decrease and can then sell that money at a rate that is more beneficial to the current rate of the dollar. The second big...
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