History Shows Us That Attempts to Fix Exchange Rates or Create Monetary Unions Between Different Countries Usually End in Failure. Therefore, We Should Not Be Surprised by the Current Problems in the Euro Zone.
Essay question: History shows us that attempts to fix exchange rates or create monetary unions between different countries usually end in failure. Therefore, we should not be surprised by the current problems in the Euro Zone. Discuss
Introduction
“A monetary system is a set of policy tools and institutions through which a government provides money and controls the money supply in an economy”.
The world has evolved through a variety of international monetary system since the 19th century.
There have been three different international monetary system:
The Gold Standard The Bretton-Woods system Floating exchange rate
The Gold Standard
The Gold Standard last from1870 to 1914 and from 1918 to1939. Under this system the countries fixed the price of their currency in terms of gold. All the currency 's prices were fixed in relation to the official gold reserve.
The Gold Standard faced its first crisis during the first World War. Most of the countries to finance the cost of the war abandoned the gold standard and by doing so caused an increase in inflation to unsustainable levels. Because this system limited the power of the central banks to supply money in an economy and therefore lower the interest rate, is easy to understand why the gold standard was blamed for prolonging the Great Depression during the interwar.
The Bretton-Woods system
The Bretton-Woods system or fixed exchange rates (1958-73) is based on the reserve currency hold by the central bank which fixes its currency exchange rate against the reserve currency by trading domestic for foreign asset when necessary. In this case the central bank fixed the dollar exchange rate of its currency by trading domestic currency for dollar assets.
In the foreign exchange market, the central bank fixed the currency 's dollar price, and so the exchange rate was automatically fixed through arbitrage.
The Floating Exchange Rate
The floating exchange rate system (since 1973)
Introduction
“A monetary system is a set of policy tools and institutions through which a government provides money and controls the money supply in an economy”.
The world has evolved through a variety of international monetary system since the 19th century.
There have been three different international monetary system:
The Gold Standard The Bretton-Woods system Floating exchange rate
The Gold Standard
The Gold Standard last from1870 to 1914 and from 1918 to1939. Under this system the countries fixed the price of their currency in terms of gold. All the currency 's prices were fixed in relation to the official gold reserve.
The Gold Standard faced its first crisis during the first World War. Most of the countries to finance the cost of the war abandoned the gold standard and by doing so caused an increase in inflation to unsustainable levels. Because this system limited the power of the central banks to supply money in an economy and therefore lower the interest rate, is easy to understand why the gold standard was blamed for prolonging the Great Depression during the interwar.
The Bretton-Woods system
The Bretton-Woods system or fixed exchange rates (1958-73) is based on the reserve currency hold by the central bank which fixes its currency exchange rate against the reserve currency by trading domestic for foreign asset when necessary. In this case the central bank fixed the dollar exchange rate of its currency by trading domestic currency for dollar assets.
In the foreign exchange market, the central bank fixed the currency 's dollar price, and so the exchange rate was automatically fixed through arbitrage.
The Floating Exchange Rate
The floating exchange rate system (since 1973)