Utopian Financial Infrastructure

Currency Exchange Rates

So far we have only discussed that foreign trade needs to be conducted in gold. So, what is the purpose of discussing the concept of currency exchange rate? Besides exports and imports, there are other kinds of international money transactions that need the concept of currency exchange rate. This is discussed in the section "The Need for Currency Exchange Rate".

One unit of the currency of some country represents a unit of value within that country. Currency exchange rate gives the equivalent units of individual units of one currency in terms of some other currency.

In order to be able to discuss the computation of the currency exchange rate, we need to discuss the following:

First, we will discuss how sovereignty leads to currencies and monetary sovereignty and how that gives gold the special status as the currency of the world. See section "Monetary Sovereigns, Currencies and Gold".

Next, we will discuss the activities that determine the natural price of gold. See section "Natural Price of Gold".

Finally, we discuss how the currency exchange rates are computed based on the natural price of gold. See section "Computing the Currency Exchange Rate".

The Need for Currency Exchange Rate

Foreign trade is priced and conducted in gold. For importers and exporters, one end of their business is in local currency and the other end is in gold. Importers and exporters, for the goods that they trade, need to know whether the "price is right" in terms of the local currency; because their profitability depends on knowing this. For this, they can use the local price of gold.

When we visit another country and when we buy and pay for stuff in this other country, since all the stuff that we purchase will be in their local currency, we need to convert our money from our currency into the local currency of the country which we visit.

What is the worth of one unit of currency of our country in terms of the currency of this other country? This question is answered by the currency exchange rates between the two countries.

Similarly, when purchasing something online from a business in some other country, we will need to know the currency exchange rate.

Similarly, when engaging in international investments, we will need to know the currency exchange rate.

Buying goods and services and making investments are examples of financial transactions where both parties exchange something that they have with the other party. Money Transfer is an example of a financial transaction that is "one-way"; one party is the giver and the other party is the receiver.

When we say that "we will need to know the currency exchange rate", we really mean that the Utopian Financial Infrastructure needs to know the currency exchange rate. This is because our financial infrastructure is the facilitator of all such transactions. So, when we engage in any one of these transactions across society boundaries, the financial infrastructure needs to know this rate so that it can present the prices of these foreign goods, services and investments in terms of our currency. Even for money transfer across the boundaries of a society, the financial infrastructures of the two societies will need to know the currency exchange rate.

Intuitively, when discussing currency exchange rate, we are discussing the exchange rate between countries. However, this discussion also applies to a society larger than a country like the European Monetary Union.

Monetary Sovereigns, Currencies and Gold

In the past and present, countries being sovereign has meant that they could mint their own notes and coins. For a country, these coins and notes are physical representations of the abstract concept of the currency of that country. Further, countries being sovereign, mandate that citizens must use only this currency for all their financial transactions within that country.

The first important aspect of monetary sovereignty and a society (and hence a country) being a monetary sovereign is that the society does not have to accept the currency of any other monetary sovereign. This means that the currency of one country is useless to transact all normal business in another country. To buy something in a country, you need the currency of that country.

The second important aspect of monetary sovereignty is that it gives the society complete authority over the form of the currency. Monetary sovereignty allows a society to discard physical forms of currencies completely and mandate that all money transactions within the society must occur digitally using their society's financial infrastructure.

The third important aspect of monetary sovereignty is that it gives the society complete authority over "creating" more copies of that currency. Currently, when the central bank of a society prints notes or mints coins, it is just creating more copies of its physical currency. In the digital age and in very simple terms, the equivalent of printing notes and minting coins, is crediting a central bank account with more of their own currency. This is digitally increasing the value in the said account. This is digitally printing money. With this higher amount in that account, the central bank could buy something and anything that it is authorized to buy. The central bank could deposit this money in that country's treasury and from there it could be used for government spending.

Utopian societies, with the authority of monetary sovereignty, can create money or destroy money. However, just because a society has monetary sovereignty, it does not mean that the society could "print" as much currency (paper or digital or both) as it "wants". That is because it has adverse consequences for its citizens.

Every time any country just prints some more of their currency, they are increasing the quantity of their money and that reduces the currency's purchasing power. People from other countries will not want to "hold" coins and notes of a country habituated to "printing money" because the purchasing power of such a currency is diminishing. Moreover, because people of any country lack jurisdiction over what some other country does with their currency, people of any country should be reluctant to hold the currency of any other country. The same holds true even when countries all over the world move exclusively to using digital currency.

Gold cannot be produced as easily as "printing money". This leads to gold being used as the international medium of value and exchange. The various properties of gold make it ideally suited to be the currency between countries. People of any country can accept gold as payment without any concern of its diminishing purchasing power.

When countries agree to conduct international trade in terms of gold, they are using their monetary sovereignty and making the best choice that any country can make.

Natural Price of Gold

Utopian societies and countries don't exist in isolation. They are part of this world. Trade between countries, that is foreign trade, is also necessary.

Gold being the medium of value and exchange across countries, there will be importers and exporters who routinely deal with gold.

Since exporters receive payments in gold, they are net sellers of that gold in the local gold market to obtain the local currency. Since importers must pay in gold, they are the net purchasers of gold in the local gold market using the local currency. There are other buyers and sellers of gold in the local gold market.

This buying and selling of gold in the local gold market depends on the demand and supply of gold and that eventually decides the price of gold in terms of the local currency in the local gold market.

Thus, in every society and country, gold has a natural price in the local currency. This price, most likely, will differ between different Utopian societies. That is, in different societies, the amount of local dollars required to buy a unit of gold will be different.

Computing the Currency Exchange Rate

Let us discuss how the currency exchange rates between the currencies of different Utopian societies or countries are computed. Suppose that we are dealing with two countries: Country-A and Country-B. Thus in both countries, gold has a price in terms of the local currency.

Intuitively, to convert some money from the currency of Country-A to currency of Country-B we take the following conceptual steps:

  • First, in Country-A, we buy some amount of gold that can be bought with the amount of currency of Country-A that we wish to convert.
  • Then, we transfer this gold from Country-A to Country-B. This transfer does not cost us anything because this is a conceptual discussion.
  • Finally, in Country-B, we sell the gold and obtain the value of that gold in the currency of Country-B.

Thus, if we needed to convert 100 Country-A dollars into Country-B dollars, then after doing the conceptual conversion outlined above, we would obtain some number of Country-B dollars.

  • If we obtain 100 Country-B dollars, then the exchange rate from Country-A dollars to Country-B dollars is 100/100 = 1.0
  • If we obtain 80 Country-B dollars, then the exchange rate from Country-A dollars to Country-B dollars is 80/100 = 0.8
  • If we obtain 125 Country-B dollars, then the exchange rate from Country-A dollars to Country-B dollars is 125/100 = 1.25

The above intuitive discussion can be crystallized as follows:

The exchange rate from Country-A dollars to Country-B dollars is the ratio of "the price of a unit of gold in Country-B in local currency" to "the price of the same unit of gold in Country-A in its local currency".

Thus,

  • If one unit of gold costs 100 local dollars Country-A and 100 local dollars in Country-B, then the exchange rate of Country-A dollars to Country-B dollars is 1.0
  • If one unit of gold costs 100 local dollars in Country-A and 80 local dollars in Country-B, then the exchange rate of Country-A dollars to Country-B dollars is 0.8
  • If one unit of gold costs 100 local dollars in Country-A and 125 local dollars in Country-B, then the exchange rate of Country-A dollars to Country-B dollars is 1.25

We could state the same currency exchange rate by reversing the "from" and the "to" countries as follows: The exchange rate from Country-B dollars to Country-A dollars is the ratio of "the price of a unit of gold in Country-A in local currency" to "the price of the same unit of gold in Country-B in its local currency".

And for the above three scenarios, the exchange rates will be quoted as:

  • If one unit of gold costs 100 local dollars in Country-A and 100 local dollars in Country-B, then the exchange rate of Country-B dollars to Country-A dollars is 1.0
  • If one unit of gold costs 100 local dollars in Country-A and 80 local dollars in Country-B, then the exchange rate of Country-B dollars to Country-A dollars is 1.25
  • If one unit of gold costs 100 local dollars in Country-A and 125 local dollars in Country-B, then the exchange rate of Country-B dollars to Country-A dollars is 0.8

The financial infrastructures of Utopian societies compute the "current" currency exchange rates between them and other Utopian societies. Each day and at each moment, this "current" currency exchange rate is based on the local price of one common unit of gold in each of the societies at some agreed upon common point or points in time on the 24-hour world clock.