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What rules govern money exchange offices?

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Voievod posted on Tue, Feb 3 2009 10:23 AM

I noticed that on: FOREX/money exchange offices/banks you can always sell your product (currency).

It doesn't make much sense to me. You're selling it because it's expensive and you make money out of it, but why are they buying it? Is there some law preventing them from refusing a transaction?

 

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Value is subjective, even the value of money.  Every free exchange results from a double inequality: the person who buys Francs with Rupals values the quantity of Francs purchased more than he values the quantity of Rupals purchased, while at the same time, the seller of Francs for Rupals values the quantity of Francs sold less than he values the quantity of Rupals received.

The value of money is not static, nor is it objective.  Even in the absence of fiat/government currency, the value of money would fluctuate.  In fact, it would fluctuate relative to every other good, possibly at times going up in relation to some and down in relation to others.  The value of money is not a single figure, expressed in money units, like most other values we might want to talk about; instead it's an array or list of values of the money compared to every other good on the market.  Money is a good like any other; it has both a supply and a demand.  It is just more complicated because we are used to using money as the unit of account for talking about the value of other goods, and there is usually no unit of account for talking about the value of money.  (The currency exchange scenario is an interesting one in that it does provide a unit of account: a competing money.  We might have such a situation even if we didn't have government currencies, as the market might adopt both gold and silver as competing monies; many earlier United States financial woes were brought on by bimetallism, the practice of trying to fix the exchange rate between gold and silver by law instead of allowing it to fluctuate.  Even in the currency exchange market we have an unusual situation because many different kinds of currency are all valued differently in terms of each other.  And you may find that a currency may gain value in relation to some currencies while losing value in relation to others.)  If we had no money, i.e., if we had only barter, the "price" of all goods would have to be expressed relative to all other goods; instead of a list of prices for different items in dollars, you'd have to have a table of values, with a number of rows and columns equal to the number of goods on the market.  This table would look much like a table of currency exchange rates.

Since currency is just a good like any other, with a supply and a demand, both Rupals and Francs have a supply and a demand.  The answer to your question lies in considering why some people might have a high demand for a particular currency.  Perhaps they live in the country that legally favors that currency; perhaps they trade with such a country.  Perhaps they are speculating, believing that in the future the value of the currency they are receiving will rise (this performs a useful market function, transmitting information useful for forecasting as well as smoothing out value fluctuations).  Perhaps they are engaging in arbitrage, taking advantage of the difference in values for a currency in more than one market (this again performs a useful market function, transmitting information between markets and causing discrepancies in price between markets to tend to dissipate).  Very likely if they engage in trading many currencies, they are able to trade the currency again for a third currency, taking advantage of the fact that currencies are valued independently of each other, and hopefully making a small or even a large profit on each transaction; you will notice that if you traded currency A for currency B, then currency B for currency C, then currency C for currency A again, you would have taken a net loss, because the values of the currencies are not static and objective across the board but are different in terms of different currencies; meanwhile, the currency traders involved would have made a profit off of you.

If you haven't already, check out Murray Rothbard's Money, which explains a lot of fundamental concepts about money that you really shouldn't miss.

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