The most sensitive and core issue in the foreign exchange trading process is price. The price of one country's currency expressed in terms of another currency is the exchange rate. Simply put, the exchange rate is the exchange rate between one currency and other currencies. How the exchange rate is determined, like the basis of international trade and division of labor, is an important theoretical issue that economists have long paid attention to and are still discussing. In different periods, due to the different real economic conditions, people analyze problems from different angles and methods. Early discussions on exchange rate determination focused on international trade, paying more attention to the foundation and long-term trends of exchange rates. The current exchange rate theory mainly focuses on the capital market and the flow of international capital. The number and scope of explanations for short-term exchange rate changes exceed the discussion of long-term exchange rate determination.

Exchange rate determination under the gold standard

As the price of a special commodity, currency, exchange rate can essentially only be formed in the supply and demand relationship following the principle of equivalent exchange in the market economy. The gold coin standard is a typical gold standard currency system. Under the gold coin standard, countries use gold as currency and stipulate the gold content of unit gold coins. It also stipulates that gold coins can be freely cast, melted, and exchanged for bank notes, and gold can flow freely into national borders. It can be seen from this that during the gold coin standard period, gold coins were the main currency used in circulation by various countries and could be freely used for external payment and settlement. Since the currency materials are the same, there is a basis for comparison between different currencies. The gold content of gold coins is fixed. Although the shapes and sizes of gold coins in various countries are different, their gold content can be used to reflect their value. Therefore, the price ratio between two currencies is the ratio of their gold contents. Under the gold standard system, the ratio of the gold content of two gold coins is called coinage parity, so coinage parity is the basis for determining the exchange rate during the gold standard period. For example: during the gold standard period, the weight of every pound of coinage was 123.27447 grains, and the fineness was 22K gold, so the pure gold contained in every pound was 113.0016 grains (123.27447 × 22 ÷ 24=113.0016). At that time, the weight of gold coins per US dollar was 25.8 grains and the fineness was 90% (9/10), so the gold content of the US dollar was 23.22 grains. Therefore, the mintage parity between the British pound and the U.S. dollar is: 1 British pound =113.0016 ÷ 23.22= 4.8665 U.S. dollars.

The output and input points of gold are always gold-losing points. The gold loss point is that only when the deviation between the market exchange rate and the legal main author's evaluation reaches a certain level, gold will be exported or imported into a certain country. The quantity limit is determined by the cost of transporting gold. For example, assuming that the cost of transporting 1 pound of gold between the United Kingdom and the United States, including transportation fees, insurance fees, and interest, is US$0.03, then, for manufacturers in the United States participating in trade with the United Kingdom, the gold loss point is: < /p>

Gold output point = exchange ratio between British pound and U.S. dollar + 0.03

Gold output point = exchange ratio between British pound and U.S. dollar - 0.03

The reason why gold delivery point becomes The upper and lower limits of exchange rate fluctuations are due to the existence of two external settlement methods, cash and non-cash, during the gold standard period. Because transporting gold for settlement is very risky and requires payment of fees, people will choose non-cash settlement when the exchange rate fluctuates around the mint parity does not exceed the cost of transporting gold; and when the exchange rate fluctuates more than the cost of transporting gold, people will choose non-cash settlement. , people would rather choose the cash settlement method, that is, no longer buy or sell foreign exchange, but directly transport gold for payment.

In fact, the existence of gold-losing points is the automatic adjustment mechanism of the balance of payments. The gold loss point is not only a mechanism to ensure the stability of the exchange rate, but also a mechanism to ensure the balance of international payments of each country, so that gold will be reasonably distributed among unconnected countries. The specific operating mechanism here is that there are correlations and constraints between gold-price-balance of payments.

(2) The basis for the exchange rate determination under the paper currency standard system

The basis for the exchange rate determination under the Bretton Woods system is gold parity

The exchange rate determination under the current paper currency standard system The basis is purchasing power parity

The so-called purchasing power parity means that the exchange rate of two currencies depends on the ratio of their purchasing power. Since the purchasing power of currency is actually the reciprocal of the general price level, the exchange rate of the two currencies depends on the ratio of the price levels of the two countries. This is absolute purchasing power parity. Relative purchasing power parity is commonly used. The exchange rate in the design calculation period is R1, the exchange rate in the standard period (base period) is R0, the inflation rate of country A is Ia, and the inflation rate of country B is Ib. Then the relative purchasing power parity is used to calculate the exchange rate. The formula is

(2) The basis for determining the exchange rate under the gold bullion standard and the gold exchange standard system

During the First World War, the gold standard system was severely damaged. Some post-war ideas Countries that restored the gold standard established a gold nugget standard and a gold exchange standard. These were severely weakened gold standards, with no gold coins in circulation. Therefore, the role of mint parity as the basis for determining exchange rates was severely weakened, and the gold delivery point no longer existed.

Under these two currency systems, the exchange rate between the two currencies is determined by the ratio of the gold content represented by the paper currency, which is called legal parity, which is a form of mint parity.

The exchange rate fluctuates up and down around the legal parity, but the range of fluctuations is no longer limited by the gold input point and the gold output point. Instead, the government stipulates and maintains this range of fluctuations.

2. Exchange rate determination during the circulation period of banknotes

(1) Period when banknotes have legal gold content

1. Gold parity is the basis for determining the exchange rate

In the early days of banknote circulation, banknotes had a legal gold content (that is, the value represented by banknotes was determined by governments based on the gold content of metal currencies in circulation in the past and stipulated in legal form). The ratio of the legal gold content of the two currencies is called gold parity. Gold parity is the basis for determining the exchange rate during this period (under the circulation of fixed exchange rate paper currency).

At that time, the government monopolized the issuance of banknotes by decree, and stipulated the gold content of banknotes in legal form with reference to the value of the original gold coins. Therefore, the gold content is the amount of value that paper money represents nominally or legally. In other words, the value represented by paper money in circulation during this period is conceptually expressed as a certain amount of gold. For example, in 1934, the U.S. government stipulated that the gold content of every US dollar was 0.888671 grams of pure gold. In other words, the value of 1 US dollar banknote in circulation was equivalent to 0.888671 grams of gold. Similarly, the British government stipulates that the gold content per pound is 3.881344 grams of pure gold, which means that the value of a pound note in circulation is the same as 3.881344 grams of gold. Therefore, under the conditions of banknote circulation, when the actual value represented by a unit banknote is consistent with the national legal gold content, the comparison of the legal gold content of the two currencies, that is, the gold parity, is the basis for determining the exchange rate. For example: 1 pound =3.881344÷0.888671=4.37 US dollars, then 4.37 is the basis for determining the exchange rate between pounds and US dollars. The exchange rate between the British pound and the U.S. dollar fluctuates up and down within a specified range around the gold parity, influenced by foreign exchange supply and demand.

2. Governments of all countries are obliged to maintain exchange rate fluctuations within the prescribed range

According to the Bretton Woods Agreement, the currencies of each member country are pegged to the U.S. dollar, and the exchange rate fluctuation range against the U.S. dollar is gold. 1% above and below parity, authorities in various countries are obliged to intervene in the foreign exchange market to maintain exchange rate stability.

(2) The period when banknotes do not stipulate the gold content

After 1973, governments no longer stipulate the gold content of currency. The ability of banknotes to purchase a certain amount of goods reflects the role of banknotes in The actual value represented in circulation. The ratio of the value represented by banknotes, or the ratio of the purchasing power of two currencies, that is, purchasing power parity, became the basis for determining the exchange rate during this period (under the floating exchange rate system of banknote circulation). The exchange rate floats freely under the influence of foreign exchange supply and demand.

During this period, with the disintegration of the Bretton Woods system, various countries generally implemented a credit currency system. Governments no longer regulate the gold content of banknotes, and the value of banknotes is no longer reflected in the amount of gold. In the circulation of banknotes, they are restricted by the laws of currency circulation and express the value of commodities as prices in their own units of measurement. When all commodities express their exchange value through banknotes, banknotes also directly express their value through all commodities. the value represented. In other words, the ability of banknotes to purchase a certain amount of goods reflects the value represented by banknotes in circulation, and the value represented by banknotes is reflected in the purchasing power of banknotes. According to the principle of equivalent exchange, the objective basis for the exchange ratio of two currencies should be the comparison of the purchasing power of the two currencies, also known as purchasing power parity. It basically reflects the comparison of the real value represented by the two banknotes in circulation. Therefore, under the credit currency system, purchasing power parity is generally considered to be the basis for determining the exchange rate.