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Monetary Commentary | by Illiad | 2009-08-24 13:35:43 |
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The farther along we go, the more it looks like... | by kelli217 | 2009-08-24 13:43:04 |
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Why? | by theymustbidiots | 2009-08-24 14:32:11 |
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I didn't say it has to be gold. (n/t) | by kelli217 | 2009-08-24 14:46:35 |
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Well, sure. | by theymustbidiots | 2009-08-24 14:48:11 |
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Gold-pressed latinum, for all I know. | by kelli217 | 2009-08-24 14:54:15 |
| Not very well, that's why it was abandoned. |
by theymustbidiots |
2009-08-24 15:17:22 |
It was basically a fixed exchange rate system on the dollar, backed by gold. Countries held exchange rates within a percentage point of the the fixed exchange rates with the dollar. Trade expanded rapidly and the gold supply did not, which meant that unless the US ran deficits constantly, liquidity would dry up and trade would grind to a halt. On the other hand, running huge deficits all the time lowers confidence in a currency and can result in a crash or in this case, a run on gold. This eventually happened and Nixon was forced to end the gold-for-dollar exchange.
The unintended consequence of a fixed exchange system is that once inflation gets started, it's procyclical. If price levels are rising faster in one country than in another, then investments in that country become more desirable because liquidating those assets after a time period will result in a positive real exchange rate, which means that more money pours in and more inflation occurs.
The modern example here is Spain and the Euro: the Spanish economy was growing very quickly by comparison with Germany or France or Italy, the three largest economies in the Eurozone. Prices in Spain were rising quickly, but the Euro was holding more or less steady in international exchange markets; appreciating against the dollar, although not dramatically. An investment in Spain was more likely to appreciate quickly because of the rising price level there: just holding an asset generated a real return. That meant that there was more demand for foreign investment in Spain, more money poured in and the price levels started rising faster. A Euro from Spain buys the same number of dollars as a Euro from Germany.
Floating exchange rates bring their own issues, but those seem to be somewhat more manageable. At least so far. |
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