CHAPTER 4

Foreign Exchange Markets With Commodity and Fiduciary Monies

Commodity Money

Commodity money is money that, at the margin, has equivalent value whether used for monetary or nonmonetary purposes. For the sake of exposition, assume that the money under consideration is gold. Assume, as well, that there are no fiduciary elements present in the system. This is a pure gold standard, with economic agents free to export and import gold.

Under such an arrangement, a given quantity of monetary gold should exchange for an equivalent amount of monetary gold. That is the basis for fixed exchange rates with a commodity money standard. In the following example, both the United States and the United Kingdom are on the gold standard. The basic monetary ...

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