World Currencies 101
World Currencies • Currency CodesEven as globalization advances and increasing amounts of business are transacted across national borders, the largest economies in the world all retain their own currencies. (Even though Canada's currency, for example, is called the dollar, it is a different currency than the U.S. dollar.)
Central Banks and the BISIn the United States, the two agencies that oversee currency operations are the Federal Reserve Bank (the USA's central bank) and the U.S. Treasury. Internationally, countries' banking agencies (the equivalents of the Federal Reserve and the Treasury) work together as members of the Bank for International Settlements (BIS), which is based in Basel, Switzerland.
Bretton Woods ConferenceIn 1944, during a conference on international monetary policy in Bretton Woods, New Hampshire, representatives from the Allied Nations created the International Monetary Fund (IMF) and World Bank. At this conference, they also established a system for fixing exchange rates — meaning that the value of one country's currency against the value of another's would not change.
The Gold StandardAccording to the Bretton Woods Agreement, all member countries would fix their exchange rates against the U.S. dollar, which the U.S. would then fix to the price of gold — the gold standard. The U.S. was responsible for buying and selling dollars against gold to maintain the dollar price of gold near $35 per ounce.
Floating Exchange RatesIn the 1970s the U.S. suspended the gold standard and instituted a new system of flexible exchange rates, which was codified in an IMF amendment in 1978. Now, the exchange rates of world currencies fluctuate according to economic conditions in each country. When a country's national debt increases due to wasteful government spending, for example, the value of that country's currency tends to drop, compared to other world currencies.
Currency InterventionsAgencies like the Federal Reserve Bank and the U.S. Treasury (and their counterparts in other countries) do sometimes engage in interventions — going into the foreign currency exchange markets and buying or selling other world currencies for U.S. dollars. In the United States, it is the manager of the System Open Market Account who carries out foreign currency operations. To enable those kinds of operations, the U.S. holds a certain amount of currency in foreign denominations. Currently, the U.S. holds about $40 billion in foreign currency reserves.
European Central BankIn the European Union, the European Central Bank has been responsible for international monetary transactions since 1999 when the European Union member countries adopted the Euro as their common currency. (Even though the Euro was formally adopted in 1999, it was not released into circulation until 2002.) Currently, the Euro is the currency of 12 EU member nations: Belgium, Germany, Greece, Spain, France, Ireland, Italy, Luxembourg, the Netherlands, Austria, Portugal, and Finland.
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