Money and Currency

Given that global trade is organized along market lines,
transactions are often (though not exclusively) carried
out by means of monetary transactions.
Money is a medium of exchange and store of value that
is accepted for the payment of any goods and services
or the settling of debts.
Currency refers to a system of money used by a nation
(or a group of nations).
As implied above, while there are currencies that are
shared by different countries (most notably the Euro,
shared by European countries in the Euro zone), there
is no single world currency, even though there are
world financial institutions and a type of world
currency .
National currencies are generally good only within the
country that issues it, and conversely, it is usually the
case that only a nation’s currency is accepted within
its borders.
Currently a nation creates a currency that is backed not by the intrinsic
value of the currency, but by the economic strength and political will of a
national government. Money is generally in the form of paper or base
Traditionally, currencies were created by minting precious metals into coins
(though other items, such as shells in ancient China, were used). While
coins would have a relatively fixed political value within a country
(enforced by government institutions), in fact their true value was that of
the amount of precious metals they contained
These metals were gold and silver for larger denominations, and copper and
bronze for smaller, domestic use. In China, copper cash, and taels (liǎng)
of silver were used.
Gold and silver were also used in trade in the form of bullion, i.e., refined
and smelted but uncoined metals.
This means that international trade often entails currency exchanges in which
one form of currency is converted into another by buying and selling. Such
exchanges also take place outside the contexts of other trades, in that
currencies can be traded like commodities and, on the world commodity
market, have floating values determined by supply and demand. Supply
and demand itself affected by a complex environment that includes the
strength of the issuing nation’s economy its stability, and the relative
desirability and overall strength of other currencies.
A currency that is low in value makes imports expensive and exports cheaper.
So it might be advantageous for a country to make its currency cheaper
(devalue it) by, for example, selling lots of it on the international market in
exchange for other currencies. Conversely, a country may need to
strengthen its currency because of the activities of speculators and buy
lots of it on the world market in exchange for other currencies.
Nations may have currencies that are not convertible to other currencies
because they are not seen as good, stable holders of value. This is
true for countries that have unsustainable debts or trade deficits, or
are experiencing hyperinflation– extremely high, uncontrolled
inflation. This makes international trade difficult, as they must
attempt to trade commodities for foreign currency or engage in other
types bartering arrangements.
Convertible currencies are currencies that can be exchanged for other
Hard currencies are those that are most readily convertible into other
currencies because they have the reputation for being good and
stable holders of value, such that nations or corporations would
want their assets denominated in such currencies.
Just as there are commodity in various cities throughout the world, there are
also several major currency markets located in New York, London,
Zurich, Tokyo and Hong Kong. It is the buying and selling on these
markets that generally sets the international values of currencies.
Both governments and private investors operate on these markets.
Governments do so to try to control the value of their currency,
intervening when it becomes too cheap or too costly. Such interventions
often require multi-lateral cooperation, as one nation alone generally
does not have enough of its own denomination or sufficient foreign
currency to make an impact on the market.
Private investors speculate in currencies, buying and selling them in the
hopes of making a profit as the values of currencies relative to one
another fluctuate in both the short and long term.
In order to have the means for dealing with
emergencies or to intervene on the world
currency markets, nations often have reserves
that are not denominated in their own
These reserves most often take the form of hard
currencies (generally dollars and Euros), but
can also take the form of gold reserves.
Apart from the market for currencies, nations also sometimes
attempt to set a fixed exchange rate for their currency. These are
official rates of exchanges enforced by governments in territories
they control. A nation can also refuse to make exchanges for its
currency at rates other than that which they officially set, but
buyers do not have to take the bargain.
The result may be difficulties in convertibility, leading to problems of
managing international trade and the rise of black markets in
that currency.
Another way in which nations may attempt to fix exchange rates is to
tie the value of their currency to the value of another (usually
stronger) currency. This is often the result of an attempt to
combat inflation internally and to strengthen a weakened
The problem is that this move a) removes sovereign control over a
currency, as it has to keep step with the foreign currency, b)
assumes that the two countries have the same monetary needs
growing out of similar economic trends, which is not always the
case, and c) if the currency country A ties its currency to is
stronger, this can hurt currency A’s exports.
Both states and corporations in general have a shared interest in stable
currencies. Stability allows both to plan expenditures and for states, to
plan trade policies. Thus states, for the most part, cooperate with one
another to prevent large swings in the worth of convertible currencies on
the world market.
But there are circumstances which work against stability. Adverse economic
reactions or political developments may lead to large devaluations of a
currency that cannot be overcome. Speculators may predict the
movements of states seeking to stabilize a currency and make the
intervention costly.
It is also the case that nations can free ride on the stability of other
countries, manipulating the value of their currency by keeping it
artificially low, or make it rise and fall quickly to gain short term
Generally speaking, stability in the world currency system is enforced by a
relatively small group of nations, generally those that possess hard
currency and posses the larges shares of global wealth.
In the past, this group was comprised of the G7 (later G8), a formal group
consisting of the US, UK, France, Germany, Italy, Canada, and Japan,
who negotiated to find a common ground in terms of financial and
currency stability.
This group is now part of a larger group, the G20, consisting of
representatives from the G7 countries (with France and Germany
represented by a EU representative), plus South Africa, Indonesia, South
Korea, Mexico, Brazil, Argentina, PRC, India, Russia, Turkey, Saudi Arabia
and Australia, plus the other members of the EU, represented by an EU
A nation may vest control of its currency in its general political leaders.
This allows for the coordination of monetary policy with political and
other aspects of economic policy.
However, such control also can lead to short term currency policies that
may be harmful to the nation in the long run, as well as policies that
are derived from attempts to implement partisan views or to gain
partisan advantage (e.g., loose monetary policies before an election).
Thus, many countries vest this responsibility with a central bank, which is
run by appointed officials who are experts in economic and monetary
In the US, this bank is the Federal Reserve, which is run by a director
jointly with a board comprised of directors of regional branches of the
Monetary policy is generally concerned with the amount of currency
that is available and the value of that money.
These are set in several ways:
• Intervention on the international market to set exchange rates–
buying or selling currency using other hard currencies
• The printing of actual currency
The setting of the discount rate: this is the rate of interest the central bank
charges commercial banks to borrow money. Commercial banks then lend out
this money on the fractional reserve system: banks only have to have on hand a
fraction of the money that is deposited with them, thus being able to lend out
several times the amount of currency they actually have on hand.
• The lower the discount rate, the more money banks will borrow, the lower the
rates they can charge their borrowers, and the more money will be in the system
(loose monetary policy). This encourages borrowing and spending, but could set
inflation in motion.
• The higher the discount rate, the less banks will borrow, the higher the rates they
will charge and the less money will be in the system (tight economic policy). This
policy will combat inflation, but risks depressing economic activity too much and
creating a recession.
It is also the case that if interest rates are high in a country, all other
things being equal, international capital will tend to flow there,
and vice-versa: if rates are low, international capital will tend to
go elsewhere.
But it is also the case that other factors are in play. Interest rates
may be high because of domestic instability, in which case those
who control capital may think the risk is too high.
And it could be that while interests rates in a country are low,
international capital may go there anyway because the risks and
problems of other locations make alternatives unattractive.
International institutions meant to overcome the problems of
creating a stable world monetary system.
As with the UN and its associated organizations, the World Bank and
IMF were created in response to the Depression and World War II
in the belief that only international cooperation on a permanent
basis and an institutional form could solve the problems that
arose due to national responses to economic crises and the
failure of countries to cooperate consistently.
At an important conference at Bretton Woods in 1944, the World
Bank was created to provide reconstruction loans for European
countries. It later became the source of economic development
loans for newly industrializing countries.
Bretton Woods also created the International Monetary Fund (IMF)
as a coordinator of international currency exchange, the balance
of international payments and national accounts, including
acting as a lender of last resort of hard currency liquidity.
Originally created an international currency exchange system based
on gold and the US dollar. The dollar was pegged permanent at a
weight of gold, with other currencies exchangeable for the dollar
at their own fixed rates that were set periodically by the IMF
Board of Governors. Countries were tasked with maintaining
these rates on the international markets, intervening to raise or
lower the world price if it fell or rose more than 1%. This system
lasted until 1971.
The system changed in 1971 because Nixon unilaterally took the dollar off the good
standard because it was overvalued at the permanent IMF exchange rate. Nixon
allowed the dollar to float, which led to its devaluation and thus allowing the US to
regain competitiveness on the world export market. But this hurt other highly
industrialized countries.
New system:
Creation of a world currency, SDR (Special Drawing Rights), that can be held by
central banks alone.
Value of SDR’s governed by the value of a basket of international currencies
US dollar pegged to the SDR at a fixed rate, thus continuing to make it the global
reserve currency for entities other than central banks, and alongside SDR’s for
central banks.
Member nations are to deposit hard currency reserves with the bank
on the basis of an assigned quota.
Such countries can then borrow against those deposits to help
stabilize their currencies in times of crisis.
The IMF itself can also use these reserves to intervene in global
crises. But whether it does in any particular instance is a matter
for the member nations to decide, with each country receiving a
number of votes proportional to its quota of deposits. This means
that the IMF is generally controlled by the wealthy, industrialized
Western nations, with the US having the largest vote share,
controlling 17 percent of the votes.

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