Currency Exchange

Topics: Foreign exchange market, United States dollar, Bretton Woods system Pages: 4 (992 words) Published: October 22, 2014
Essay on Currency Exchange
When nations buy and sell goods and services with one another, they need to know how much their money is worth in another nation. Exchange rates determine the value of one country’s currency in another country. If a country has a favorable exchange rate with the United States, U.S. dollars will be worth more in that country than if the exchange rate were unfavorable. Exchanges of different currencies take place in the foreign exchange market.

Exchange rates were fixed for the most of the 20th century. The rates were kept constant according to the gold-exchange standard. For each currency there was determined amount of gold which they could be exchanged. This system made foreign exchange markets very slow to respond to changing events.

In 1944, representatives from forty-four western nations met at Bretton Woods, New Hampshire, to establish a fair way of determining worldwide exchange rates. Under the Bretton Woods system, exchange rates between foreign currencies were fixed against the value of the U.S. dollar. The U.S. dollar was fixed at $35 per ounce of gold and all other currencies were expressed in terms of dollars. The system worked well at first because the U.S. economy was much stronger than any other. However, after a few years, the economies of other nations grew and the relative value of the U.S. dollar went down throwing the Bretton Woods system out of the balance. Therefore, in 1971, the system was reformed into a floating exchange system, whereby the values of currencies relative to one another are free to change daily. In a floating exchange system, the value of a nation’s currency reflects the health of its economy.

Nevertheless, there were some advantages of the gold standard system. It served as a common measure of value. Rate changes were very rare which made long-term planning much easier and less risky. Inflation was under control.

There were also negative sides of this system. It began to weaken in...
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