Читать книгу Foreign Exchange: The Complete Deal - James McDowell. Sharpe - Страница 9

In 1914 a holder of a £1 note could go to the Bank of England and exchange the note for 0.257 ounces of gold. Similar practices existed in other European countries and the USA, which meant that there was a fixed exchange rate between the major trading currencies.

The key element in the adjustment mechanism was that domestic money supply in a country was directly related to the amount of gold held by the country’s central bank. If the UK was running a deficit there was a net outflow of pounds from the country. When these pounds in turn were exchanged for gold at the Bank of England there would be a net outflow of gold from the UK. With the reduction in gold, the Bank of England would have to make a corresponding reduction of notes in circulation. This led to a reduction in money supply as cash was withdrawn, a rise in interest rates, a reduction in loans, a weakening of prices, and cutbacks in output and employment. Meanwhile, the gold arriving in Paris or Berlin (for example) would prompt an opposite pattern: the expansion of loans activity and an associated rise in prices.

In this example, the fall in demand in the UK would reduce imports, and exports would become more competitive as prices fell. Employment would be restored, the current account would be returned to equilibrium and another cycle would begin. A deficit on the current account could not be corrected by a devaluation of the currency (as it might be in 2011) because under the gold standard mechanism the currency was fixed in value. Imbalances were corrected through deflation and reflation via interest rates and fiscal policy.

In effect the First World War marked the beginning of the end of the standard as the belligerent powers were forced to reduce their gold holdings to pay for US weaponry and wheat. US gold stocks at the end of 1914 stood at $1.5bn but by the end of 1917 they were valued at $2.9bn. In practice there was no longer a workable distribution of gold stocks because there was abundance in the US and paucity almost everywhere else.

Efforts to revive the gold standard were made in the 1920s but with little success. After the First World War no major country allowed the free export of gold. This meant that domestic policy was no longer constrained by the fear that gold would go offshore. The prospect of reduced note circulation, bank loans, and the depressing impact on prices, employment and production had been removed. As such, countries were now free to pursue their own policies with no immediate regard for what other countries were doing. The coordinating discipline imposed by the gold standard (reinforced by a balanced budget mantra) had gone.

This is similar to the dilemmas facing international exchange management in the early part of the 21st century as the demise of the gold standard coincided with growing nationalism and a growing tendency to hold governments accountable for economic performance. Under this new freedom the greatest inflations of modern history in Germany and Austria occurred, as well as the rise of fascism and communism, protectionism, and the Great Depression.

The arguments in favour of a fixed rate revolve around certainty and economic discipline. Extreme volatility under a floating exchange rate system is regularly cited as its principal weakness. This is simply because in international business there is usually an element of futurity: deals are struck now against future payment. When a currency changes in price from day to day this introduces instability or uncertainty into trade, which affects prices and in turn sales. In a similar way, importers are unsure how much it is going to cost them to import a given amount of foreign goods. Related arguments are also applied to foreign investment flows, which involve the purchase or sale of equities, bonds, commercial interests and fixed assets, e.g., land and property.

This uncertainty can be reduced by hedging foreign exchange risk, and banks have created a panoply of products to resolve this problem, many of which are discussed later. These products have certainly reduced the negative impact of volatility on trade and investment. As we have seen, trade flows and current account balances have historically been the drivers of foreign exchange markets. Of growing importance is real money portfolio flows (bonds and equities) and any hedging that may be applied to these investments. Fund managers may hedge all, part or none of their exposure.