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The Dollar And Gold In International Finance

Since 1956, there has been the need to reduce the large and persistent deficit in the United States international payments. These have limited the choice of measures to secure both domestic and foreign economic objectives. This management is intended to increase the ability of the United States to finance its payments deficits, both by increasing the amount of gold available to foreign official institutions from other sources and the reduction of the foreign official demand of gold from the U.S treasury. This would, therefore, give the United States a lot of time to achieve a satisfactory international payment balance and less severe policy conflict.

The active dollar in international finance management can extend the ability of the U.S reserves to finance the U.S payments deficit, thus providing a partial substitute for large international reserves. It will also reduce the constraint on the domestic and economic policies choice resulting from the need to reduce the U.S payments deficit. The management, therefore, focuses on increasing the time available for the correction of these imbalances and thereby widening the range of choice for domestic and foreign economic policies.

The Obligations

Both by legal obligation and customary practices, the United States is committed and mandated to exchange rate stability and unrestricted payments freedom. The U.S authorities must be able and be prepared to buy excess dollar held by foreigners and to finance those purchases with assets that can be accepted by foreigners to maintain this commitment.According to the current international financial arrangements of U.S gold parity of $35.00 per fine ounce, and the willingness of the U.S treasury to sell and buy gold in transaction with foreign official institutions. Also, only limited change in the price of gold and foreign currencies regarding dollar is permitted.

Historical Establishment

When the gold price of the United States of $35.00 was first established, the Secretary of the Treasury announces that it would sell at $35.0875 and buy at $34.9125, which is a margin of 0.24 percent, either side U.S gold parity. This led to the spread of gold in the market, which has made other countries to maintain the spread between the rates at which they sell and buy their currencies in the exchange market against the dollar. Most countries especially those in the Western Europe have supported their currencies at 0.75 percent either side of parity, chiefly through purchase sales of the United States dollar. Currently, the cost of shipping gold between New York and London is estimated to be at $08-10 cents per ounce. When the demand for gold is weak in London, the price falls to at least $34.80 before it is in position to gain profit such that it can be sent to New York .Even though there is only one price for gold in London for gold at any time, there are two gold markets in London. One market comprises of the institutions which have the alternative of buying gold from the United States, while the other market comprises of private parties who cannot buy gold from the U.S treasury.

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