If, by chance, you’re not familiar with my work, I focus on the Federal Reserve System.
That’s the formal name for the central bank of the United States, most often referred to simply as “the Fed.” Those who are familiar with my work might even say it’s a bit of an obsession for me, and they might not be wrong.
The Fed is no small thing. It drives monetary policy, guided by a “dual mandate:”: by following a dual mandate: maximize jobs and wages and stabilize prices.
Since the U.S. dollar is currently the world’s reserve currency, policy decisions made by the Fed impact not just the relative strength of the dollar but also influence everyone that does business with us – a group that includes basically every civilized country on the planet.
The Fed’s role here in the U.S. is pretty clear, but what about its international role?
Let’s back up a minute and pick our way through some history. At the Bretton Woods Conference in 1944, the International Monetary Fund (IMF) and the World Bank were created to help less developed nations build stronger economies.
The IMF’s role is to promote monetary cooperation between countries by stabilizing exchange rates and acting like the world’s traffic cop. The World Bank was created to lend money (with the promises or backing of the most powerful governments) for the purpose to aid underdeveloped nations feed their hungry and rise their standard of living.
That all sounds great…
In 1944, exchange rates were determined by how much gold a particular currency could buy in the open market (which did not mean currencies were backed by gold). Values were set by supply and demand, which was an efficient method to determine a currency’s true value.
The problem with this method was that central bankers couldn’t manipulate their currencies.
In the 1970s, gold was phased out as a standard to measure currency value. And, voila, central banks were free to manipulate their currencies without the penalty of having their currency automatically devalued by other banks.
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