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Foreign Currency Financial Reporting from Euro to Yen to Yuan: A Guide to Fundamental Concepts and Practical Applications by Robert Rowan

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CHAPTER 5

The Gold Standard

Following the Standard for Fiat Currencies

The voyage of the best ship is a zigzag line of a hundred tacks.1

—Ralph Waldo Emerson

Does the “gold standard” exist? We read in Chapter 1 that on August 15, 1971, U.S. president Richard Nixon ordered the conversion of dollars to gold to cease. As a result, other currencies could not peg their value to the gold standard—that is, they could not define their currencies in a fixed number of dollars, with the value of the dollar set at a fixed value per ounce of gold, as established in 1944 as a result of the Bretton Woods Agreement. The exchange rates of the world’s currencies that were pegged to the dollar then were left to float.

Today we find ourselves awash in floating exchange rates. Some governments do institute currency controls, either pegging the country’s currency exchange rate as a fixed number of units relative to another currency; or pegging the units to a basket of currencies, such as a specific weighted average of euro, Japanese yen, and U.S. dollars. China provides an example of just such a control, and in fact has transitioned through at least five different mechanisms between 1979 and today.2 There even could be flexibility for the exchange rate to fluctuate so long as it remains within a certain range. For example, ERM II, the mechanism for controlling exchange rates of countries planning to join the euro, set a range within which the currency’s exchange rate must remain. However, one (or one’s ...

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