1. What gives money its value in today's economy? and Why is the U.S. dollar still viewed as the world's primary reserve currency?
also another question:
2. What was the experience of the US with fixed exchanged rate system established under bretton-woods agree? What does bretton-woods tell us about the principal advantage or disadvantage of a floating exchange rate system compared to a fixed rate system?
1. People "trust" in the full faith and credit of the us government.
Not to mention legal tender laws that force you to use the money.
I usually prefer if rates were to be fixed as it acts as a counter agains inflation (if the money is ever fastly inflating, there is a fixed ratio to keep check), whereas a floating exchange, youve got nothing to worry about, if anything id prefer the government to not touch any currency and just let the free market determine exchange rates (remember, if there is a government, you must put a limit to it).
The bretton woods system was dollars tied to gold and other countries money tied to the dollar.
Gold <--Dollar <-- other country[mostly in europe]
As more gold is mined and the dolar inflates, the other countries currencies would inflate even faster. Other governments began to lose trust in the system and started exchanging their money to dollars and dollars to gold- hence gold flowed out of the us economy, while the dollars flowed in. Dollar inflated while gold flew out of the country, it was difficult to maintain the ratio of 1/35th ounce of gold per dollar, and such, to maintain the ratio, even more gold was needed to be let go (dollars would be converted to golds). This led to the "two tier gold market" in which gold was exchanged for dollars in floating ratios, but when governments traded with each other, they kept it at a 1/35th ounce ratio, in a way we can say that the central banks actions were isolated from that of the market, from now on when governments traded with each other, they would only trade gold in their little circle of central banks. This idea however only bought a short amount of time before actual collapse. Gold rose and the dollar and other money currencies fell. No more gold to trade with the us.
Nixon then severed all ties to gold.
More info here: http://wiki.mises.org/wiki/Bretton_Woods_System
Fixed vs floating applied to the euro: http://mises.org/daily/6069/An-Austrian-Defense-of-the-Euro
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1. Force and coercion. The US Government doles out strict penalties for those who it catches not using its currency.
2. The only thing that made Bretton Woods work for as long as it has was that it tied to the US Dollar in some way to gold. Then the other currencies then fixed to the dollar. This broke down during hte Nixon presidency as the bills for the "Great Society" and the Vietnam War came due. Nixon not wanting to make more people mad at him simply ended Bretton Woods make the US Dollar a full fiat currency. And any other group that creates a fiat currency that uses the dollar in a fixed manner will only import USA inflation making themselves worse off.
1. What gives money its value in today's economy?
It was the Gold Standard that gave money its value but sinse money was made into fiat money and exhanged with other currencies in the global currency market, the value of a currency is determined by its value in ratio to other currencies. This is determined by simple supply and demand for one currency against another.
and Why is the U.S. dollar still viewed as the world's primary reserve currency?
Same thing as ever: its use as a medium of exchange.
also another question: 2. What was the experience of the US with fixed exchanged rate system established under bretton-woods agree? What does bretton-woods tell us about the principal advantage or disadvantage of a floating exchange rate system compared to a fixed rate system?
This is another can of worms to itself. Bretton-Woods was the prelude to unlinking the dollar from gold in 1971. The Elites have been pushing everyone towards a single, global bank for at least a century. While they had hoped that Bretton-Woods would be the final stage, it turned out that was not to be. While the EU was in planning by Bilderberg from 1954, the French eventually started calling in their gold from the US treasury starting in 1967. In the interim between the establishment of the Bretton-Woods system in 1944, the London Bullion Market Association had been acting as the "slush fund" for gold price-fixing. The breakdown of this system brought about what is today called "Bretton Woods 2" but this is not really an official agreement so much as a status quo.
The establishment of the European Central Bank fundamentally altered the status quo such that I think we should actually speak of Bretton-Woods 3. The ECB created a counter-point to the Federal Reserve. There is a bitter rivalry between the Fed and the ECB. It is my view that Greece is an expression of this rivalry and I suspect that the Fed is working through Greece to create a crisis for the ECB and the EU itself. Nevertheless, all central bankers whole-heartedly agree on the long-run goal: a worldwide, fiat currency administered by a global central bank.
Clayton -
What gives money its value in today's economy?
Lots of things.
We should probably inquire as to why people prefer it as a medium of exchange...
They don't necessarily prefer it. Legal tender laws, domestically, virtually force citizens to pay taxes in them; the Fed Res Note is a means to pay taxes, where silver and gold would only be counted as much as the government says that they are worth. For instance, gold is currently at $1780 per ounce, but the government, I think, still only recognizes an ounce of gold as $45. So paying taxes in gold is a bad idea.
You can kind of mix legal tender laws with federal budget deficit. The legal tender laws ensure that the US can create Treasury debt and force a demand for them through the payment taxes.
Fiat or debt standard (pending on how you look at it), the lack of a gold standard allows banks to create as much credit as they want and for governments to borrow as much as they want. When you can make loans indefinitely, and your legal system won't get your for fraud or counterfeiting, you can make a lot of good loans (loans that are successfully paid back. There are obvious flaws here, but bailouts make sure it still "holds together") and keep the demand for your service high. So, in turn, a world with an excessive capacity for low interest debt can come to the phantom money factory and get it; they like it this way. But, mostly that is just banks and their immediate agents. I would also say that "excessive capacity" comes from the ability of the loan originators to make as many loans as they want (central banks).
You can mix this in with Exchange rate value, but that situation is deteriorating rapidly.
Agreements with other states (or more likely their central banks) to hold certain quantities of US dollars in the reserves (lots of countries do this). When countries hold us dollars it means that they are capitalizing their own debt based fiat currency with our debt based fiat currency.
Private institutions, banks, and international organizations also use "eurodollars" to capitalize their doings. A eurodollar is just a us dollar that is kept in an account anywhere in the world other than the US.
...and the petrodollar scheme; this method of securing demand for US paper has been very effective. People want their country to grow and ultimately that growth is predicated on energy resources. So, if a country wants to expand production and the place where they get their oil from is on the petrodollar standard, they must acquire US dollars to buy their energy resources. This is why Saudi Arabia is crucial to us energy/financial policy.
Only because "they" haven't figured out how to move to a floating fiat basket reserve. They have theorized about an IMF based sythetic currency, but the East isn't really down for that. My guess is that more and more countries will attempt to create their own petro-currency standards. Hopefully in doing this it will stagnate the economic power that States get in the event of securing a petro-currency standard in a foreign oil producting nation.
Qeustion 2. has been answered.
What gives money its value..
Menger versus Mises and Rothbard on how money works
I hope you do well on your homework.