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International & Domestic Currencies

At that moment in time there were rigid International Rules which stated your currency in circulation had to be backed entirely by gold. In other words if a country had say 10 million ounces of gold as it's reserves--it could only issue the equivalent of $320 million in notes and coin. For either of two reasons countries started to opt out of being on the gold standard; they either needed to print more currency for domestic use, or they did not have the foreign currency funds to purchase gold. So as one country after another opted out of the gold standard , less and less gold was being held to back domestic reserves. More or less at a similar period of time, hastened by the Great Depression as currencies were devaluating , the price of gold took off ; no more held at the price of $32 per ounce as people lost faith in their currencies and converted cash into gold bullion.

Going back to centuries ago, gold and silver were the metals or " coinage" used to settle international trade. Not only that , but people created their own wealth by being in possession of both metals. However as both domestic and international trade grew , it became impossible to deal in bullion , and thus at first coinage replaced bullion, and finally because of weight concerns paper money started to replace coinage.

In ancient times there were other precious or semi- precious stones or even pearls and silk used as a means of settling international trade debts; except that these were used perhaps more as "barter value" than as a "currency". In later years spices, tobacco, coffee and other commodities were used to settle trade debt. After countries opted out of or off the gold standard which started after the first World War, the Great Depression and the debts incurred during the 2nd World War played havoc with currencies; especially as they related to each other. International Exchange Rates during this period seemed to have little "cohesion" to each other. Countries seemed to be able at will, to devalue their currency when they either felt it necessary to do so; found it advantageous to do so--or were compelled to do so. After the First World War It took a barrow - full of German Marks to buy the barest essential foods to feed a family for one day. Prices altered hourly.

It is not the intention here to chronicle the use of Money in any chronological order, nor to write of it as a scientific treatise, but merely to apply " logic" in examining its use and it's worth. The dictionary defines the word " logic" as follows: " The basic principles of reasoning", and to a large extent that is the approach which we shall attempt to apply not only to this subject , but to all that is written here on various subjects. Where we differ in opinion to those world renowned experts who have influenced modern concepts of finance and economics and to those whose opinions today control these present structures, we offer no apology. All we hope to do is to set out what we feel is wrong with what we presently have, and hopefully to change this either to some small or larger degree.

Literally millions of words have been written about "money", not only it's function, but also to attempt to explain it's meaning. Look up any dictionary--and you will get a half column to a full column attempting to define the word money. We prefer to be somewhat more precise, and state it as follows: Money is a means of payment. It is also perceived to be a store of wealth. And leave it at that!

When we use the word money at this stage we would like it to refer to notes--bank notes or as Americans call them, " bills" as in "a twenty dollar bill." In the days when currencies were backed totally or practically totally by gold holdings, the notes would have printed on them words to this effect. Changeable at the Reserve Bank ( or the Bank of England ) for it's worth in gold. In other words one could take say a British five pound note to the bank and demand it's equivalent in gold at the price at which gold was trading at the time, either as bullion or as a pure gold coin such as the English sovereign and half sovereign. Not so today. The Canadian bank note merely states; this note is legal tender ". The American bank note states ; " this note is legal tender for all debts, public and private. That's It. No promise to exchange it for Anything!

In looking for a definition for money, we used the word "perceived." This is intentional and this word will crop up fairly regularly both in dealing with money , as well as in finance and economics. Many people use figures and graphs to illustrate a point; we prefer to illustrate a point or concept by means of a story. So let us attempt to find a value for money.

In a small village the local grocery store sold loaves of bread for one dollar a loaf. So a loaf cost one dollar. Now let us say this two other ways. A loaf of bread is worth one dollar, and said the other way --a dollar is worth one loaf of bread. A disaster overtakes the village and hungry people are searching for food. One hundred arrive at the grocery store to find it in bad shape . However there are 4 loaves of bread left and they all want them. The owner cannot decide who should have these . So he decides they should go to the highest bidder. The first loaf goes for $50--the second for $100 and the last two go for $200 each. So at that moment in time the Dollar had it's value--as it fell from one dollar being able to buying a loaf of bread--to eventually having to use $200 to buy one loaf of bread! In other words it's value was perceived to have dropped to . 5 % of it's previous value.

As countries reserves of gold dropped, they were to an extent replaced by other country's currencies. But if a country cannot define the WORTH of it's currency to it's citizens; how are other countries able to define it's worth? Surely reserves have two functions? One to back it's domestic currency, and the other in order to pay it's International debts. A number of countries have recently stated their intention to sell off their reserves of gold. Then what?

If gold is to be demonetized then surely it must be replaced with something tangible. Or a NEW SET OF RULES has to be agreed upon . Let us for a moment examine two illustrative stories. A country with a population of 5 million has an abundance of cheap electrical power and vast reserves of copper. The metal is sold on world markets and the foreign funds derived is used to pay for imports. Their domestic budgets are balanced --they have no foreign debt--their local currency is LEAD WASHERS ! All sizes and shapes. AND THE CURRENCY IS NOT BACKED BY ANY RESERVES .

The population is paid in washers, and all their purchases are paid for in washers. And they paid their tax's with washers. There came a time when the government wished to earn more foreign currencies to pay for further imports as it was their policy not to run up "balance of payment deficits." They had a highly intelligent and highly skilled workforce, so they advertised overseas for foreign companies to open industries in their country.

As an incentive they offered cheap land; cheap electricity; no tax's on company profits or output of goods. And they offered a cost of labor equivalent to one U.S. dollar per hour. There was however one stipulation. Render weekly wage sheets to the government together with their value in dollars. The govt. in turn would fill the wage packets with washers to be paid out to the workers. Thus the govt. had an instant supply of foreign currency. In no time at all, French, German , Italian and British companies opened industries and soon 2 million new jobs had been created and as a result this small country became a much sort after trading partner.

An American business man arrived one day to investigate prospects, and on arrival wanted to purchase the domestic currency. He was told to pay $2 per a particular size washer. " What -- $2 dollars per lead washer?" He was told that any remaining washers would be repurchased at the same rate. The taxi ride to town cost him two washers ( $4 ) for a ride that in New York may have cost him $ 20. His stay at the 4 star hotel overnight, incl. a full breakfast, set him back 20 washers ( $ 40 ) as against his hometown equivalent of maybe $120. By the next morning he was making enquiries as to tax's; and to terms for possible immigration.

This little story has a lot of very important implications; and perhaps a few lessons to teach us as well. So let us examine a few of these.

3) The country determines what it's currency is worth to all other currencies. In this   instance, they could if they wish use any one foreign currency to determine what to charge another; either as determined by present international cross - reference rates, or whatever rate was mutually agreed upon between them.

4) The currency has no determined international worth, other than that decreed by the country concerned, and it cannot be used outside of it's borders.

6) Thus in reality, all foreign currencies value themselves against the lead washers as their perceived value of the cost of goods and services. This aspect must be emphasized as it will be referred to in a discussion on currency exchange rates.

7) The Govt. . controlled all the foreign currency earned. Should any citizen exit the country, they exchanged their savings of washers for the desired foreign currency.

Again the exchange rate was at the discretion of the Govt.  This point will be referred to again when discussing fixed as against floating or variable international exchange rates. The second illustrative story is as follows:

A small South American country desired to start a textile industry. They wrote to the German manufacturers of high speed Sulzer Looms and requested that a sales representative call to discuss the possible purchase of five of these looms . On his arrival they were told that each loom would cost U.S.$ 250,000 each or it's equivalent in D. MARKS . The Govt. . stated that at that moment in time they were short of foreign currency..

Would they accept 200,000 bags of potatoes delivered to them as full payment for the looms. The salesman said he would put this offer forward --and get back to them. Their offer was accepted and they were advised to ship 40,000 bags to Saudi Arabia; 80,000 to Egypt and 80,000 to Germany. The Saudi's shipped an agreed volume of oil to Germany--the Egyptians delivered Egyptian cotton and the delivery to Germany was sold in Europe at a handsome profit .This episode may be classified by some as merely a barter arrangement. However there are as well other factors involved which also apply.

d) At no stage was a price decided for the potatoes . For this exercise offers were made and accepted all around . In other words each member of these transactions determined their own worth to a bag of potatoes. This is an important statement, as again the perception of a value applies.

So what was the point to these two tales. What do they offer to questioning the value of a currency? First of all it seems evident that a currency can operate without having to be backed by any type of reserves. However it should be evident that in this case the currency could possibly only be used as a domestic currency. However it must be pointed out that in this case, this was exactly what was required by the govt. of this country. THEY wanted control of their own currency! Also the citizens were happy with the currency. Their perception was that they were happy with what their currency could purchase locally.

Another point to be made. If they were purchasing an imported article at a cost to themselves at half the price of the U.S. dollar, then they were evidently happy with what it was costing them in relation to their earnings in lead washers! Moving on to another factor .Their currency was in no way burdened with either domestic or foreign debt.

Nor did their country have a " balance of payments problem " with any currency. Then surely any currency of a country which has no debt , local or foreign , MUST be worth more than others who have? There must be degrees by which one can measure the value of one currency against another . The value of a country's G.D.P. or G. N. P .against that of another is surely purely a comparison of SIZE of an economy, not it's strength? One surely has to deduct local and foreign debt from the equation? Perhaps also continuing fiscal deficits and as well possibly "balance of payments deficits" have to be brought into question?

Basically one gets back to that word which we use so often--which is that of perception . Let us opt for perhaps one more story to illustrate this . We use the nationality and currency purely as a convenience, and for no other reason.

An American's favorite lunch is a HAM SANDWICH, for which he pays $5 at his favorite delicatessen. He goes to Germany on business. Landing in Frankfurt he goes to a deli. and orders a ham sandwich. In all respects it is as good as what he has at home. He asks if they will accept U.S. dollars. The answer is "yes." The price was $5 U.S. for the sandwich. His perception is that the currencies are equal in value.

His next stop is Dusseldorf where the sandwich, equally as good, cost him $3.50. -- so his perception was that his currency was stronger than the local currency. Finally he gets to Hamburg where the sandwich cost him $7--and his perception was that the local currency MAY be stronger than the U.S. dollar. Finally, having concluded his business, he fly's to Hungary for a few days break. In Budapest he buys a bottle of "BULLS BLOOD", a lovely red wine for U.S.$5 per bottle. Getting back to the States he goes to his local liquor store and asks if they have BULLS BLOOD wine." Yes. The price is $10 per bottle!"

So how do we attempt to evaluate one currency against another. Especially if one takes out of the equation that currencies are not backed by tangible assets. Or that different proportions of assets are being applied to back currencies. Put simplistically in practical terms; it is one's ability to pay one's debts. It has surely nothing to do with the SIZE of your economy --or how many notes you have in circulation (or lead washers) for that matter.

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