Currency Gambling for Forex

Forex: The Gold Standard in Foreign Exchange

Assuming that the countries in question are on the gold standard, each national currency unit has a gold parity--- determined by the official purchasing and selling price of gold; and the different currency units can, therefore, easily be compared as to their relative gold value.

A country is on the gold standard when its monetary authority, central bank or treasury is obliged to buy and to sell gold at a fixed price in unlimited amounts and when everyone is free to import and export gold.

Under these conditions it is always possible for residents in gold standard country to procure money of another gold standard country at a rate of exchange which is determined, first, by the cost involved in sending the gold from one country to the other--- packing, transportation, insurance, loss of interest. During the brief gold standard period between World Wars I and II (which lasted in England from spring 1925 to fall 1931), the dollar-pound rate was established at $4.8666:1 pound because one gold sovereign contained 123.274 grains of gold, eleven-twelfths fine.

The cost of sending a pound sterling worth of gold from New York to London was about 2 cents, and an American could, therefore, always get pounds sterling at a price not higher than $4.891. Since under the gold standard conditions in both countries these shipments were an alternative to the buying of foreign exchange on the exchange market, the price of the pound sterling in the United States could not rise beyond $4.891, the so-called gold export point.

Similarly, an American owning claim on English money had the choice to sell these claims on the foreign exchange market, or to collect in England, buy gold there, ship the gold to the United States and sell it for dollars. Under gold standard conditions, one would, therefore, never sell a pound sterling for less than $4.8841, the so-called gold import point. A further important feature of the gold standard system is that it attempts an automatic integration of the money and credit policies of the gold standard countries.

To simplify the explanation of this process of integration, which is known as the gold standard mechanism, it will be assumed that all transactions take place between two countries only. If, under gold standard conditions, the United States imports from Britain have exceeded the value of its exports to Britain, the demand for pounds sterling will increase and the dollar price for the pound sterling will rise. This will tend to raise the price of English commodities and securities for American buyers since the pound sterling, the entrance ticket to English markets, has become more expensive.

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