1. Deficits are responses to local conditions – excessive inflation, low productivity, or
2. Current account deficits mean country is importing capital
3. Surpluses will pay for imports and come back as foreign-owned investments
The focus of this Global debate explores the debate: “Fixed FX Rates, Perhaps Hooked to Gold, or
Floating Rates Hooked to Faith?” Currency is the “lubricant” for global trade but what backs a
country’s currency was long-considered a determinant of global FX stability. Stepping away from the
Gold Standard created floating exchange rates and has been the focus of debate as to its causes of global
economic and currency volatility. This serves as a starting point for a stimulating class discussion on the
viability of fixed or floating exchange rates
Debate: Fixed FX Rates, Perhaps Hooked to Gold, or Floating Rates, Hooked to Faith?
Most economists support the idea that floating exchange rates are beneficial for the world
economy. A small minority of experts advocates a return to the gold standard and fixed exchange
rates. Let’s further consider this choice.
Central Reserve/National Currency Conflict
Every member of the IMF keeps a reserve account, a bit like a savings account, with holdings the country
can draw on when needed to finance trade or investments or to intervene in currency
markets. Countries with the largest reserve accounts are China, Japan, Taiwan, Russia, Korea, India, and
Hong Kong. The reserve assets are gold, foreign exchange, SDR, and reserve
positions in the IMF. The U.S. dollar has been the most used central reserve asset in the world since the
end of World War II, and at the end of March, 2011, roughly 34 percent of the world’s reserve assets were
held in dollars and 15 percent in euros. Since 2007, the trend has been downward for the dollar and the
euro. The dollars, held in the form of U.S. Treasury bonds, earn interest, so the more dollars held in the
central reserve account, the better. But the countries holding those U.S. dollars in their foreign reserve
accounts don’t want their central reserve asset to lose value, and therein lies a contradiction: at some
point, holding large numbers of U.S. dollars (or any other product) in supply causes them to lose value.
G7 FX Intervention
After the Japanese earthquake that struck on the east coast of Honshu on
March 11, 2011, the yen strengthened considerably. In the first week after
the earthquake, it had hit an all-time high against the U.S. dollar of Y76.25.