Gold Standard Foreign Exchange Market

The gold standard is a monetary system in which the standard economic unit of account is fixed weight of gold. With the gold standard, United States economy would print currency that equaled a specific value of gold. Meaning, you could cash in your money for a specified amount of gold because a unit of currency equals a specific amount of gold.

To give you the perfect example, the gold exchange standard, established at Bretton Woods after World War II, worked until the 1970's when it collapsed due to inflation and the surplus of the U.S. dollar held outside the United States. They used gold because of its rarity, durability, and the general ease of identification through its unique color, weight, ductility and acoustic properties. Gold is an internationally recognized commodity, which is why there are still holdings of gold.

When Bretton Woods was abondoned in the 1970's, market forces of supply and demand controlled exchange rates. The main characteristic of this period was an extreme precariousness, which led to the market deregulation, open trade and a rise in speculators. The advent of the computerized transactions has led to the main business of the exchange being speculation in the futures of different currencies, rather than buying and selling of goods. This gave rise to the Foreign Exchange Market.

The Foreign Exchange Market (FOREX) is the largest market in terms of the value of cash traded, with an average daily value that is greater than $1.9 trillion. The 10 most active traders in international currencies account for 73% of all market business. These traders are large international banks that repeatedly make available the market with both buy and sell prices, which establish the bid. Interest rates, global trade, inflation and political events affect currency prices.

Due to the over-the-counter or easily obtained methods of trade in currencies, there is no single rate for each currency. Rather the values depend on which bank or market maker is trading. This made the markets more competitive. The most traded currencies are the U.S. dollar, Euro, Japanese Yen, British pound sterling, Swiss franc, Australian dollar and Canadian dollar.

The major players in currency trading are: governments and central banks; banks and investment banks; hedge funds; businesses; consumers; and major investors and independent investors. The rules of trading are highly unfavorable to retail investors, because large minimum position sizes force small traders to take risky large positions. Lack of experience and small amounts of capital make private investors in currencies a high-risk endeavor for these traders. Smaller retailers would most likely be ruined in these types of transactions because of the lack of knowledge and playing power when it comes to trading in a high risk format and are usually discourage to partake in these high risk trading.

Some disadvantages would be the major defect is inherent lack of liquidity. The world's supply of money was limited by the world's supply of gold. This limited the supply and demand. Any discovery of gold would cause prices to rise abruptly. More gold meant the need for more currency, which raised the price of gold.

Gold is no longer used in any nation, but some private institutions are still using it. We will never be able to go back to using the gold standard because it would cause a decrease in the money supply and the economy would collapse. There also is not enough gold to back all of the dollars out there given the size of our economy.