Utopian Financial Infrastructure

Currency Exchange Rates

This chapter discusses the concept and the computation of currency exchange rates between Utopian Societies.

Overview

Current societies have a mechanism for establishing the exchange rate between currencies. Citizens and organizations use this mechanism to trade currencies. However, currency trading is impossible in Utopian societies because:

  1. In Utopian societies, there is no physical currency. Therefore, it is impossible to exchange physical currencies across society boundaries.
  2. Utopian societies are monetary sovereigns. A Utopian society has full control over its own currency, and no control over another Utopian society's currency. The implementation of local policy does not require the currencies of other Utopian societies. Hence, from a Utopian society's perspective, the currencies of other Utopian societies have no practical value.
  3. Utopian societies do not value possessing other societies' currencies, even in digital form. Local money is both an asset and the medium of exchange within the economy. Within a Utopian society, citizens' and entities' accounts record ownership of assets and money in the local currency. There is no mechanism to record, as an asset, some amount of currency of another society.

However, a currency exchange rate is required for monetary transactions between Utopian societies. For example, it is required to enable sellers to quote the price of items in their local currency, and to enable potential buyers to view the same price in their local currency.

One unit of a country's currency represents a unit of value within that country. The currency exchange rate shows how much one unit of a currency is worth in another currency.

The previous chapter explained that foreign trade in precious commodities must be conducted using gold (that is, gold ETF units). We also mentioned that all Utopian societies use the same weight of gold as the unit of their gold ETF. In what follows, for brevity, we will use the term "gold" instead of "gold ETF units" or "one unit of gold ETF".

In every society, the price of gold fluctuates daily. This is because importers and exporters of precious commodities use gold as the currency of payment. For this, importers have to exchange their local currency for gold, and exporters have to exchange gold for their local currency. This leads to the buying and selling of gold in the local market, causing price fluctuations. Additionally, citizens and organizations frequently buy and sell gold as part of managing their investment portfolios.

These transactions establish a natural price of gold in terms of the local currency of the society.

The natural price of gold enables us to establish the currency exchange rates between societies' currencies.

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

From Country-A's perspective, the currency exchange rate indicates how many Country-B dollars equal one Country-A dollar. The equality of value is in terms of the price of gold in those two countries.

Thus, if the price of gold is 200 in Country-B and 100 in Country-A, then

  • One Country-A dollar is worth two Country-B dollars. That is, the currency exchange rate from Country-A dollars to Country-B dollars is 2.
  • One Country-B dollar is worth half a Country-A dollar. That is, the currency exchange rate from Country-B dollars to Country-A dollars is 0.5.

For further details, see the "Computing the Currency Exchange Rate" section.

Currency exchange rates apply to all international monetary transactions that do not require gold as currency.

Utopian currency exchange rates are not influenced by short-term demand and supply considerations between any pair of currencies. These considerations arise from the uneven flow of payments and receipts involved in trade between the pair of societies.

The price of gold in each society depends on the totality of demand and supply for gold within that society. At any given time, the totality of demand and supply for gold within a single society is more stable than the demand and supply for currency exchange between that society and any other society.

The Utopian currency exchange rate is significantly more stable when compared to the present-day currency exchange rates. It represents the true equivalent worth between a pair of currencies.

Each day, at a designated time, UFIs compute the current exchange rates between Utopian societies based on the most recent price of gold in each society. If desired, this "current" exchange rate can also be computed more frequently.

This concludes the discussion on currency exchange rates.

Computing the Currency Exchange Rate

Let's discuss how currency exchange rates are computed between different Utopian societies or countries.

We will illustrate this with hypothetical examples involving the currencies of two countries: Country-A and Country-B. In both countries, gold is priced in their respective local currencies.

To convert money from Country-A's currency to Country-B's currency, we use the following conceptual steps:

  • First, in Country-A, with the amount of currency of Country-A that we wish to convert, we buy gold.
  • Then, we transfer this gold from Country-A to Country-B. Since this is a conceptual discussion, no costs are involved.
  • Finally, in Country-B, we sell the gold and obtain the value of that gold in the currency of Country-B.

Thus, to convert 100 Country-A dollars into Country-B dollars, using the outlined conceptual conversion, we obtain a certain amount 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 computation in the examples above can be summarized as follows:

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

Thus,

  • If gold costs 100 local dollars in 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 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 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 gold in Country-A in local currency" to "the price of gold in Country-B in its local currency".

And for the above three scenarios, the exchange rate of Country-B dollars to Country-A dollars will be 1.0, 1.25 and 0.8 respectively.