How/what Determines A Currency's Value?

[Dominicana_1965]

I would like to know how and what determines a currency's value..for instance gold over doller, pound vs. doller. peso vs. doller etc.

[Demogorgon]

Well there are a lot of diffeent factors at play. Most currencies these days are traded on markets though and it is the market forces which determine their value. Currency speculators play a big part of course because they can buy and sell a lot of currency very quickly. They are motivated by trying to make a porofit, so they will consdier different countries' interest rates, level of inflation, general state of the economy etc. Also if they expect a currency to rise or fall in value quickly, watch them go. Of coourse that contributes to it's change in value so it all goes round in a circle really.

[Trent Steele]

The supply and demand for a currency determines its value, like anything else in a market driven system.

This is affected by interest rates and inflation, if money invested in a country is likely to retain its value well and investments are likely to make good returns, banks and the like will demand that country's currency. The performance of the stock markets, etc of a country affects the exchange rate for the same reason.

Another big factor is imports/exports, if one country wishes to purchase goods or services from another, they will need that country's currency. When Country A buy's Country B's currency, they will buy it with their own currency, increasing the supply of Country A's currency as well as incresing the demand for the currency of Country B.

They're the two main factors in determining exchange rates. Not all currencies are market driven, though. Some countrys' central banks (eg China) regulate exchange rates through control of the source of the currency and through interest rates.

[here for the revolution]

also it has to be backed up by gold.
you can have ten tonnes of gold and make one unit worth 1 ton (hypothetical), which is obviously worth more than a unit worth 1/2 a ton.

apparently because it says on a sterling note `this note entitles the bearer to the sum of ... pounds` you can go into the bank of england and ask for that much in gold.

[Trent Steele]

Originally posted by here for the [email protected] 18, 2007 10:25 pm
also it has to be backed up by gold.
you can have ten tonnes of gold and make one unit worth 1 ton (hypothetical), which is obviously worth more than a unit worth 1/2 a ton.

apparently because it says on a sterling note `this note entitles the bearer to the sum of ... pounds` you can go into the bank of england and ask for that much in gold.
That stopped being true at the start of the 20th century. Almost no currency is now guaranteed in such a manner.

EDIT: Gold is still used by many central banks as a reserve. Basically, if anything really nasty happens to a currency, then that central bank can sell their gold (give it a certain value in their currency in order to stabilise the exchange rate). And by individuals and banks as a store of value (for pretty much the same reason, gold will still be scare and therefore valuable even if the currency they hold most of their wealth in collapses).

EDIT 2: It's also worth mentioning as an aside that the standard that used to be in place in the UK, and the meaning of the "promise to give the bearer on demand" on banknotes, is based on silver, not gold. That's why the currency is called 'pounds sterling'.

[Demogorgon]

Originally posted by here for the [email protected] 18, 2007 09:25 pm
also it has to be backed up by gold.
you can have ten tonnes of gold and make one unit worth 1 ton (hypothetical), which is obviously worth more than a unit worth 1/2 a ton.

apparently because it says on a sterling note `this note entitles the bearer to the sum of ... pounds` you can go into the bank of england and ask for that much in gold.
Not any more. National reserve banks often still hold goldd, but these days they are more concerned with having reserves in dollars or Euros.

If you present a bank note at the bank of England, they will give you the value in coins. In theory currency is still based on coins and bank notes just represent them as they are easier to caarry. That is why they all say "promise to pay" on them.

[here for the revolution]

sorry bout that, my history teacher is obviously wrong then, he told us it still was. But then what is the currency backed up on? there must be something it represents to give it it's value

[Trent Steele]

Originally posted by here for the [email protected] 18, 2007 10:41 pm
But then what is the currency backed up on? there must be something it represents to give it it's value
Nope, other than the fact that everyone else is using the same currency and the central bank of that currency will strive to maintain its value, a currency is only what good and services people are willing to exchange for it.

EDIT: Your history teacher is a bit of a tit then, a troy pound of gold is worth around £4104.

[Demogorgon]

Originally posted by here for the [email protected] 18, 2007 09:41 pm
sorry bout that, my history teacher is obviously wrong then, he told us it still was. But then what is the currency backed up on? there must be something it represents to give it it's value
Not really. The value of a currency these days is simply what it will buy.

What used to happpen a lot in the past though (up until the eighties) and what some countries still do today is simply peg their currency to another currency. That is they say one unit of their currency is worth so much of another. For example after the second world war Britain declared the pound to be worth I think it was four dollars. The trouble with that was it made the currency very vulnerable to currency speculators who would try to break this and turn a huge profit. Also if the government did have to revise the currencies value it was political suicide. For example a while after setting the pounds value at four dollars it had to be reduced to two dollars eighty and of course this made imports more expensive and the political fall out was immense.

This happened more than once as well so you can imagine the effects.

A more recent example would be what happened to Argentina in 2002

[phoenixoftime]

Scenario: You are running a socialist country with a command economy. You have abolished money and all forms of internal private business. Until such time as you can achieve useful economic independance, foreign trade will still be important. Would you still need to have reserves of your own currency for trading purposes, or is there a way around this? If so, would a fixed, regulated or floating exchange rate be preferable?

[Demogorgon]

Originally posted by [email protected] 19, 2007 05:49 am
Scenario: You are running a socialist country with a command economy. You have abolished money and all forms of internal private business. Until such time as you can achieve useful economic independance, foreign trade will still be important. Would you still need to have reserves of your own currency for trading purposes, or is there a way around this? If so, would a fixed, regulated or floating exchange rate be preferable?
I don't think you could abolish currency if other countries were still using it and you wanted to trade with them.

I think though if such a situation were to occur the country in question would hold large amounts of foreign currency and use that to trade with. Of course it wouldn't be able to buy up foreign currency which would make that complicated.

[Trent Steele]

Originally posted by [email protected] 19, 2007 06:49 am
Scenario: You are running a socialist country with a command economy. You have abolished money and all forms of internal private business. Until such time as you can achieve useful economic independance, foreign trade will still be important. Would you still need to have reserves of your own currency for trading purposes, or is there a way around this? If so, would a fixed, regulated or floating exchange rate be preferable?
It would be possible to hold reserves of foreign currency for international trade. Actually, it could be very attractive for other countries if they didn't have to change their money into another currency in order to purchase the country's exports, instead paying their own currency to be held in reserve by the central bank. This currency could then be used to import goods.

For dealing with smaller nations with unstable currencies, a widely accepted currency such as US dollars could be used. Such large, stable currencies in addition to gold and the like could be used as a store of value for the nation.

Since the central bank would handle all the money, a moneyless system could be maintained within the country itself.

[ComradeRed]

Originally posted by Trent [email protected] 18, 2007 01:20 pm
The supply and demand for a currency determines its value, like anything else in a market driven system.
Like the rest of bourgeois economics, this is full of shit.

A Critique [of the rest] of Bourgeois Economics (http://www.revleft.com/index.php?showtopic=56640)


This is affected by interest rates and inflation, if money invested in a country is likely to retain its value well and investments are likely to make good returns, banks and the like will demand that country's currency. The performance of the stock markets, etc of a country affects the exchange rate for the same reason. There is Madness in their Method (http://www.debunking-economics.com/Sample/method.htm), the sample chapter from Steve Keen's Debunking Economics covers (lightly) the problems with monetarism (which appears to be part of the bourgeois economical canon -- its equation is ubiquitous everywhere in bourgeois economics textbooks anyways!).

Actually, if you really think about it, the total quantity of money times the value per unit money is theoretically equal to the total value of all the output of an economy. Think about it in a "freeze frame" economy (as vulgar economists can only think statically): output held constant, double the money supply and you half the value of money. Double the ouput, hold money constant, you get the money's value doubled.

But don't fall victim to the bourgeois trap of switching the independent and dependent variables around. The consumer's behavior is the dependent variable (http://en.wikipedia.org/wiki/dependent+variable), the production process is the independent variable (http://en.wikipedia.org/wiki/independent+variable); the Neo-Ricardians have demonstrated this point in a statical economy to be true.

[Trent Steele]

I'd say currency markets are one of the only markets in which supply and demand can be said to affect things in the traditional economics sense (though not in anything approaching a strict sense, with movements along nice smooth curves and such).

As most of the dealing is done electronically between large banks and other corporations, there is good information available to buyers and sellers; and since the corporations involved tend to be quite large, they can afford to employ skilled people to buy and sell, meaning there isn't the usual imbalance between buyers and sellers you see in other markets (such as large companies selling products to individuals).

And yeah, I'll have to agree with you about monetarism. Money is just a concept, it's value is in the imagination of those who use it. Changes in the supply and demand for money don't magically make factories and farms more or less productive.

Great guide though, it fleshes out quite a few doubts I've had about the kind of economics I get taught at school. Particularly the idea of prices being a feedback from the market, it's essential to the principles of supply and demand, and clearly complete rubbish (as sellers dictate the price of products, not buyers).

[ComradeRed]

I'd say currency markets are one of the only markets in which supply and demand can be said to affect things in the traditional economics sense (though not in anything approaching a strict sense, with movements along nice smooth curves and such). How does the market control the M0 Money supply? :huh:

And what's to prevent the M4 money supply from approaching infinity (as time approaches infinity, but the rate of M4 supply expansion being exponential whereas time being linear)?

There's just no cause for me to believe that money supply is governed by supply and demand (and there is significant room for doubt that the value is determined by people's subjective whims!).

[Kropotkin Has a Posse]

Money seems pretty arbitrary to me.

[gilhyle]

Comrade Red seems to me to be talking about the value of money, i.e. the purchasing power of a unit of a currency - the commodities it can purchase in that economy.

The cross valuation of currencies is a different (if related) question. Marx, to my mind, rightly locates the basis of this in the balance of payments - i.e. the supply and demand for that currency internationally. His comments on this are limited, but I see nothing wrong with the basic idea. In other words it is not so much the commodities that can be produced with the stock of money, but the commodities actually being bought abroad, versus those being sold abroad.(This is actually the balance of trade - but you know wht I mean)

the role of the State in 'backing' the currency at any particular rate is a complication, but doesnt alter the fundamental point and relates only to controled forex regimes.

Where exchange rates 'free float' this isnt relevant, although central banks where countries do free float still hold reserves for intervention. Central Banks also manipulate interest rates to influence demand for the currency.

Other complications are speculative purchases and sales and leading and lagging activities and also situations where commerce involves selling abroad in one's own currency or purchasing in foreign currencies without having to sell one's own currency.

None of this changes the fundamentals.