Q. 1 Contrast and evaluate the chartist and commodity views of how barter economies transformed into monetary ones?
The Chartists hold the view that the barter economy never existed. Money was adopted in major world economies to facilitate carrying out of transactions between parties. Paper money does not derive its value from independent precious metals held the private market. However, money is powered by government’s declaration of it as legal tender to be used as the medium of exchange so that authorities can collect taxes from enterprises running in the economy (Walton, 1999, p. 74). On the other hand, the commodity view of money postulates that currency derives its value from independent backing by the private market and the government through precious metals such as gold. The commodity theory postulates that the barter economy transformed into a monetary economy to encourage specialization in production, and the collection of taxes by the government.
Q. 2 how are the form and value of currencies determined?
Bank notes and coins are the most popular forms of currencies currently. The form of currency chosen has to possess several characteristics and these include divisibility, durability, transportability and acceptable by all as it is backed by the government (Connor, 2004, p. 190). Paper money printed by central banks has these characteristics. Under the current regime of floating currency exchange, which was adopted after the collapse of the US dollar and the gold standard, forces of demand and supply determine the value of the currency. Nations all over the world trade with each other leading to activities of importing and exporting. This leads to the demand of foreign currencies to pay for imports. The foreign nations also demand our local currency to pay for their imports. The more a currency is demanded the higher its value and vice versa.
Q. 3 critically discuss the political and economic factors that led to the establishment and demise of the financial order in the west during the golden age era.
The Bretton Woods system
The golden age, the long boom, or the postwar economic boom was a period that witnessed significant levels of economic growth and prosperity in the western world. Various economic and political factors explain the long establishment of economic prosperity leading to financial order, and eventually its collapse. The Bretton Wood system was officiated adopted on 22 July 1944 while the Second World War was being fought. About 730 delegates representing the allied states converged in New Hampshire USA, and came up with a new financial system designed to stabilize the international monetary system (Wang, 2009, p. 22). The nations’ delegates agreed unanimously to enforce the new monetary policy designed to have a fixed exchange rate and to tie the members’ currencies to the American dollar (Wang, 2009, p. 23). The international monetary fund was created to solve imbalances of trade and payment. From the year 1945 to 1971, the member state economies experienced high economic growth, including countries such as France, West Germany, Italy, and Greece that had been devastated by the war. However, during the early 70s when President Nixon led the Vietnam invasion, the United States economy started running a trade deficit because billions of dollars were used to finance the war. The year 1970 was a turning point, the U.S. gold coverage fell from 55% to 22% (Wang, 2009, p. 24). Nations that held the dollar lost faith in the U.S. ability to trim its budget deficit. For instance, during a six months period in the year 1971 alone, assets worth $22 billion fled the U.S. as investors responded to Nixon’s executive order 11615 on the Economic Stabilization Act that imposed price controls and 90-day wage. The dollar became inconvertible to gold directly (Wang, 2009, p. 24). This ended the Bretton Woods System. The dollar became fiat currency.
Reference List
Connor, D. E., 2004. The basics of economics. Westport, Conn.: Greenwood Press.
Walton, J. K., 1999. Chartism. London: Routledge.
Wang, P., 2009. The economics of foreign exchange and global finance (2nd ed.). Berlin: Springer-Verlag.
