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From the beginning of man-kind there has been buying selling and trading. Rice for corn, gold for coal, liquor for tea are just a few examples of trade from the beginning. But how could man-kind make this easier if they did not have anything to trade? How about a monetary system, something that you could give that is worth money. This is still trading but instead it is trading goods for other goods this is trading goods for money. What happens when you decide to trade internationally? How can your tribe or country’s money compare to others’ worldwide? This is where the “Gold Standard” comes into effect.
Finally something that is worth the same everywhere will base how much your broken-down monetary system is worth. Today we have the Foreign Exchange which does trillions of dollars a day in monetary trading, but first let us start from the “Gold Standard” to learn how it started.
The “Gold Standard” is a way to trade internationally for goods and products. Let us say that $20 USD can buy 1 ounce of gold and 200 Yen can buy 1 ounce of gold. With this in mind 200 Yen is equal to $20 USD. That is a ten-to-one ratio and now we know that when buying a $1000 USD product from the United States the person paying in Yen would have to pay 10,000 Yen.
The “Gold Standard” was a great leap in the monetary system allowing trading between countries much easier. The downfall was that not all of the countries were using this system and had difficulty trading. The United States for one was on a bimetal system using gold and silver as their currency system and it was not until later that the United States shifted to a uni-metal system. That system would be the gold standard.
The gold standard was a commitment by participating countries to fix the prices of their domestic currencies in terms of a specified amount of gold. National money and other forms of money (bank deposits and notes) were freely converted into gold at the fixed price. England adopted a de facto gold standard in 1717 after the master of the mint, Sir Isaac Newton, overvalued the silver guinea and formally adopted the gold standard in 1819.
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Let us move on to the Foreign Exchange Market or FOREX. This is the current system used to exchange trillions of dollars every day. It is open 24 hours a day and is the “world’s largest and most liquid market in the world.” (Structure of the foreign ¶1) You ask what is the advantage of the Foreign Exchange Market. Constant change of currencies for banks and investors. In today’s world we are working around the clock to keep up with business, especially since the implementation of the internet. Now investors can use the FOREX for their personal investments. There is an exchange rate between the domestic currency and every other currency in the world.
There are five major trading centers associated with the FOREX: New York, Singapore, Hong Kong, London, and Tokyo. These major trading centers cover most of the time zones in the world and are constantly trading. The most traded currency is the US Dollar. Looking at the chart below this is how the other currencies of the world rank in traded currencies.
As you can see the US Dollar is by far the most traded currency in the world followed by the Euro, Japanese Yen and the Great Britain Pound. By trading the major currencies of the world we can operate more efficiently and in today’s world we need to operate as fast and as efficient as possible to keep up with the demands.
A few years ago, foreign exchange trading was limited to banks and other large financial institutions. Now in this electronic age, any person can perform online trading with a personal computer and the Internet. Almost all banks, hedge funds, pensions, and mutual funds are involved in foreign exchange trading. Money can earned regardless if a currency is gaining or losing its value. (FOREX VEDA ¶2)
There are four main trading pairs that the FOREX uses. These currencies are: USD-Yen, Euro-USD, European Pound-USD, and Swiss Franc-USD. Why is this important you ask? These are the main currencies of the world. The USD is the most traded monetary fund traded and therefore each kind of money is traded with it and then broken down farther from there.
We have gone over the Gold Standard and how it led to the foreign exchange market rise to the point it is now. Trading trillions of dollars everyday, open 24 hours a day to make our lives and our international trading much more easily. Imagine trying to trade an IPOD from Japan for a tire in today’s world. That might make it a little difficult when doing this to millions of trades per day. On top of things being bought there is billions and billions of dollars being used for investment purposes with bonds and stocks. By having the Foreign Exchange Market our lives can be ran just as simple as we know. But when you start to break down how this foreign exchange market works things become more apparent on how hard people work behind the scenes to make our lives as simple as possible.
Bordo, Michael D. (n.d.) Gold Standard. Retrieved on May 22, 2008 from http://econlib.org/library/enc/goldstandard.html
Structure of the Foreign Exchange Market. (n.d.) The Foreign Exchange Market of the United States. Retrieved on March 22, 2008 from http://www.newyorkfed.org/education/addpub /usfxm/chap3.pdf
The Foreign Exchange Market.(n.d) FXTrade. Retrieved on May 23, 2008 from http://fxtrade.oanda.com/learn/what_is_forex/currency_exchange_market.shtml
Welcome to FOREX.(n.d) Forex Veda. Retrieved on May 23, 2008 from http://www.forexveda.com/