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CH 21] Business 101 21-5

when Americans travel to the vast reaches of the world in 2021, they will trade 100
US Dollars for 84 Euros which is the currency of the European Union; or 72 Pounds Euros (EU)
Sterling, or 109 Japanese Yen, or 2,050 Mexican Pesos. In other words, they’ll Currency of the European 21
Union. There are currently
convert their currency so they can spend like the locals. The exchange rates 27 European nations in
determine how much local currency and coinage they get in relation to their dollars the EU and include:
US. This same exchange rate also affects the value of foreign goods sold in the US Austria, Belgium, Bulgaria,
and US goods sold in other countries. Croatia, Cyprus, Czech
Republic, Denmark,
Market conditions and governmental action can change a country's exchange rate Estonia, Finland. France,
through devaluation or revaluation. Devaluation is the reduction of a currency's Germany, Greece,
value in relation to other currencies or precious metals. Devaluation of the dollar (an Hungary, Ireland, Italy,
inflationary action) makes U.S. goods sell for less abroad and reduces costs for Latvia, Lithuania,
Luxembourg. Malta,
visiting foreigners, and thus more desirable from a cost to consumer standpoint. On Netherlands, Poland,
the other hand, devaluation increases the price U.S. consumers pay for imported Portugal. Romania ,
goods and makes foreign vacations for Americans more expensive. Finally, Slovakia, Slovenia, Spain,
devaluation makes it more expensive for U.S. firms to buy assets abroad and less Sweden.
expensive for foreign firms to purchase U.S. assets. Devaluation occurs when a
government puts more currency in the market place, a fiat action, an inflationary devaluation
Reduction in value of a
action, and occurs when their currency is not tied to precious metals; gold or silver. country's currency.
Non-linking to precious metals allows governments to print fiat currency and also
allows a government to be dishonest with its currency. As an example, the United
States stopped linking its currency to Silver in 1967. At that time 1 US dollar could
purchase 1 silver dollar that weighed 1 ounce. In 2020 the average price of a Silver
dollar was $18. This exchange rate now reflects a market fluctuation of dollars to
silver dollars and has varied from $5 in the 1980’s to as high as $40 in 2013, and its
current exchange value rises and falls in relation to the nation’s inflation — the
government printing more Federal Reserve notes.
Revaluation is the upward movement of a currency's value in relation to other
countries or precious metals. Revaluation of the dollar would make U.S. goods more revaluation
expensive abroad and make it more expensive for foreigners to visit the United Upward adjustment in the
value of a nation's currency.
States. At the same time, it would make foreign goods less expensive for American
consumers and make overseas vacations more affordable. Finally, it would make it
less expensive for U.S. firms to buy assets abroad and make domestic U.S. assets
more expensive for foreign firms.
Revaluation will cause the price of precious metals to decline. This is a reflection
of inflation coming under control by government and a stabilization of pricing for
consumers. Changes in exchange rates can create a competitive advantage as well as
affect considerations on whether or not to invest abroad. U.S. goods would be pushed
out of many markets, both domestic and foreign, because consumers will select
products based on the price they pay. At the same time, expansion of overseas
production becomes more attractive as foreign supplies and labor cost become less in
terms of U.S. dollars.

Fixed and Floating Exchange Rates. Toward the end of World War II, the
representatives of the major Allied powers met at Bretton Woods, New Hampshire,
to plan the postwar monetary system. They established a system of fixed exchange fixed exchange rates
rates where the relative value of currencies was determined by government policy Exchange rates fixed by gov-
and was supposed to change only when a country could not keep a stable balance of ernment policy.

payments at a particular exchange rate. Fixed exchange rates were thought to provide
a predictability and stability that would help the growth of world trade. This system
was undermined by persistent balance of payments deficits by the United States (and
to a lesser extent in the United Kingdom), forcing devaluation of the dollar in 1971
and 1973 and an eventual decision in 1973 to let the market set the dollar's value.
This began the system of floating exchange rates, where currency traders create a floating exchange rates
market for the world's currencies based on the countries' trade and investment Exchange rates that vary
prospects. The precursor to demise of the fixed exchange rate occurred when the according to market
conditions.
United States went off of a standard of supported currency. President Johnson (D) in
1967 took US currency off the silver standard, US dollars were no longer linked to
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