RE AN INTERNATIONAL ECONOMY AND CURRENCY

RE AN INTERNATIONAL CURRENCY

The monetary states of affairs that exist in many parts of today's world--being a major component of world affairs--are further cause for worry and concern.  One need not be an economics professional to conclude that profound problems concerning our world's financial system presently exist.  This is additionally borne out by the fact that, worldwide, a number of economic experts and officials have called for fundamental reform of our international monetary system.  Across the globe, we learn that economists are burdened with concerns about the status of their particular nation's current account and its capital account.

A nation's "current account" basically consists of a comparison of its imports to its exports of goods and services to other nations.  We hear this more commonly referred to as an expression of that nation's "balance of trade."  At the same time, that nation's "capital account" traces the status of the difference between foreign purchases of that particular nation's assets (such as realty, stocks, and bonds) as against that nation's own citizens' purchases of like assets of other nations.  When current account and/or capital account deficits occur (i.e., when the value of nation A's imports exceeds that of its exports; or when the purchases of foreign assets by the citizens of nation A exceed the value of purchases by foreign persons or entities of nation A's assets), there is worry and concern; and occasionally implementation of hostile or retaliatory demands or strategies.

These aforedescribed imbalances are sometimes made to happen, when nation-state A, seeking to move ahead commercially and industrially, begins to "flood" the rest of the world with its products; and simultaneously discourages or prevents the purchase by individuals and entities of its own nation from importing and purchasing products from many of the very countries that are the recipients of its strongly active marketing efforts.  (It is fair to state in addition that these imbalances can also be prompted by more innocent factors as a current trend in taste within nation B for the products of nation A; and/or the relative income levels within nations A and B.)

But a factor which has much greater influence upon the aforesaid balance of trade is the current "exchange rate" of a nation's currency against that of one or more of its trading partners.  When a country's currency appreciates (i.e., when it is valued at a higher rate as against the currencies of other nations than it used to be), that country's situation will usually follow a natural path which includes a greater quantity of imports, marked by a corresponding reduction in the amount or value of its exports.

The methods via which exchange rates are determined include:
a.  the Gold Standard, wherein all currencies are denominated in ounces of gold;
b.  "Pegged" Exchange Rates, wherein currencies are valued in regard to one another; and
c.  "Free-Floating" Exchange Rates, wherein the rate is determined by "market forces" (i.e., as in any other open market, by buyers and sellers of currency).
To avoid undesirable extreme fluctuations, the amount by which a currency value might vary (or "float") may be limited, or "managed."

Aristotle once asked, several thousand years ago:  How can one find the number of sandals equivalent to the value of someone's dinner?  The only feasible universal answer to such a question was devised by man via the development of a common denominator having the properties of a worldwide standard of value; in a word:  currency.

The world's economy is international in nature; and thereby rests upon an international monetary system.  The aforesaid common denominator that constitutes the "backbone" of this system used to be based upon the traditional acceptance of gold by most people in the world as a token of value.  Under the Gold Standard, One Thousand Dollars used to be able to be readily converted into "X" ounces of gold; which could, in turn, be readily converted into "Y" Francs, or "Z" Marks.  Until 1914, these relative values were all fixed and unchanging.  Exchange rates between the world's currencies remained stable; and countries' respective currencies did not "appreciate" or "fall."  British Pounds Sterling, French Francs, German Marks, and American Dollars thus maintained the same relative values, one as to the other, year in and year out.  Until then, currency was synonymous with the words "universal standard" regarding mankind's activities in business and trade.

However, shortly thereafter, and specifically during the years between World Wars I and II, most nation-states abandoned the Gold Standard, and took part in a devaluation of their currencies for the sake of advantage in international trade.  Controlling factors were abandoned; and currencies werer permitted to "float' in relation to each other.  The result has been a situation in which the myriad of currencies of our world are in a state of constantly fluctuating values in relation to one another.

As the currency of nation A appreciates in value as against that of nation B, imports into nation A from nation B--paid for with the now more valuable units of nation A's currency--thereby become cheaper--and, for this reason, more accessible to more of the people of nation A.  Imports into nation A of goods from nation B consequently increase.  At the same time, exports from nation A to nation B--priced by the exporters in the aforesaid more valuable units of currency of nation A--become more espensive to the pepople of nation B, and therefore less accessible to them.  Consequently as well, exports from nation A to nation B begin to decrease.  A solution that the exporters of nation A can resort to--in order to maintain the same export level, or quantity, as prior to the said appreciation--is to reduce the prices they set for their exported goods.  This, of course, is less than desirable to the manufacturers and/or sellers of such exported products. 

Such changes in exchange rates, or of the relative value of the currency of nation A as against that of nation B, also produce consequent effect upon the value of foreign investments.  The value of an investment belonging to an investor from nation A, in a stock or enterprise within nation B, becomes reduced, when an appreciation in the value of nation A's currency causes a consequent relative decline in the value of the currency of--and thus of the value of the investment within--nation B.

Appreciation in the value of the currency of a nation can result from the inflow of large quantities of foreign capital.  That is to say, a surge into nation A, of capital from investors within nation B, can cause the relative value of nation A's currency to rise, as against that of nation B.  This is a simple application of the concept of supply and demand.

Since there is no longer a system of fixed exchange rates in place concerning the numerous currencies of the world, our monetary system has thus become quite unstable.  Such instability serves to breed financial disturbances--which, in turn, cause disruptive impact upon the economic lives of individuals within various "nation As" as well as "nation Bs."

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In 1944, as World War II was winding down, the brilliant cognizance of John Maynard Keynes led him to propose the creation of a single world currency (the "Bancor"), and an associated "International Clearing Union," for use in worldwide trade within the postwar economy.  But, like so many other logical and sensible suggestions, Keynes' concept was never implemented.

Following World War II, the famous Bretton Woods Conference sought to re-establish the equivalent of Gold Standard conditions, including fixed exchange rates, and ready convertibility of various currencies.  The International Monetary Fund (IMF) was established to thus fix and regulate said exchange rates.  Each nation-state who was a member of this consortium was permitted to modify its exchange rate only with IMF consent.  Moreover, a country could borrow from the IMF (whose resources consisted of funds furnished thereto by member nations in accordance with their relative wealth), where necessary, in order to compensate for a temporary trade imbalance. 

In the 1970s, this "Bretton Woods System" came to a halt, and currencies began to "float" against each other once more.  So too did the value of gold--which had once been the fixed standard against which all currency values rested.  Now, gold values began to "float" and to once again vary upward and downward from day to day.  Loans made by the International Monetary Fund to nation-states were employed to maintain sustainably high exchange rates for short periods.  During these intermezzos, wealthy natives and foreigners were able to transfer their private funds to other countries at favorable terms.  Subsequently, the exchange rate would inevitably tumble, leaving the local workers and taxpayers hard-pressed to repay their IMF creditors.

The within paragraphs obviously do not constitute the first suggestion that currency throughout the world ought be strictly and immutably coordinated.  A primary reason behind such suggestions consists of the fact that, under the present state of affairs, national monetary systems are subject to numerous opportunities for abuse of many sorts.

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