Gresham's Law: "Bad Money Drives Out Good Money." A Statement Often Used To Define The Insight and
Gresham's Law: "Bad Money Drives Out Good Money." A Statement Often Used To Define The Insight and
Introduction
"Bad money drives out good money." A statement often used to define the insight and
observation of the 16
th
century businessman, Sir Thomas Gresham when he noticed that when
light coins circulate together with the coins of proper value and weight, people will keep the
good ones and pass on the bad ones. In other words, when there are two forms of money with
same denomination are existing in the public, the one with higher metal value will be moved out
of the circulation because the people will keep it and will only use and spend the lower form. In
economics it is a theory that cheaper money replaces more valuable money. To further
understand the Gresham Law, below are the different sub-topics explaining Gresham Law.
Government Meddling With Money
Gresham's Law and Coinage
A. Bimetallism
Government imposes price controls largely in order to divert public attention from governmental
inflation to the alleged evils of the free market. As we have seen, "Gresham's Law"--that
artificially overvalued money tends to drive artificially undervalued money out of circulation--is
an example of the general consequences of price control. Government places, in effect, a
maximum price on one type of money in terms of the other. Maximum price causes a shortage--
disappearance into hoards or exports--of the currency suffering the maximum price (artificially
undervalued), and leads it to be replaced in circulation by the overpriced money.
We have seen how this works in the case of new vs. worn coins, one of the earliest examples of
Gresham's Law. Changing the meaning of money from weight to mere tale, and standardizing
denominations for their own rather than for the public's convenience, the governments called
new and worn coins by the same name, even though they were of different weight. As a result,
people hoarded or exported the full weight new coins, and passed the worn coins in circulation,
with governments hurling maledictions at "speculators," foreigners, or the free market in
general, for a condition brought about by the government itself.
A particularly important case of Gresham's Law was the perennial problem of the "standard."
We saw that the free market established "parallel standards" of gold and silver, each freely
fluctuating in relation to the other in accordance with market supplies and demands. But
governments decided they would help out the market by stepping in to "simplify" matters. How
much clearer things would be, they felt, if gold and silver were fixed at a definite ratio, say,
twenty ounces of silver to one ounce of gold! Then, both moneys could always circulate at a
fixed ratio--and, far more importantly, the government could finally rid itself of the burden of
treating money by weight instead of by tale. Let us imagine a unit, the "rur," defined by
Ruritanians as 1/20 of an ounce of gold. We have seen how vital it is for the government to
induce the public to regard the "rur" as an abstract unit of its own right, only loosely connected
to gold. What better way of doing this than to fix the gold/silver ratio? Then, "rur" becomes not
only 1/20 ounce of gold, but also one ounce of silver. The precise meaning of the word "rur"--a
name for gold weight--is now lost, and people begin to think of the "rur" as something tangible in
its own right, somehow set by the government, for good and efficient purposes, as equal to
certain weights of both gold and silver.
Now we see the importance of abstaining from patriotic or national names for gold ounces or
grains. Once such a label replaces the recognized world units of weight, it becomes much
easier for governments to manipulate the money unit and give it an apparent life of its own. The
fixed gold-silver ration, known as bimetallism, accomplished this task very neatly. It did not,
however, fulfill its other job of simplifying the nation's currency. For, once again, Gresham's Law
came into prominence. The government usually set the bimetallic ration originally (say, 20/1) at
the going rate on the free market. But the market ratio, like all market prices, inevitably changes
over time, as supply and demand conditions change. As changes occur, the fixed bimetallic
ratio inevitably becomes obsolete. Change makes either gold or silver overvalued. Gold then
disappears into cash balance, black market, or exports, when silver flows in from abroad and
comes out of cash balances to become the only circulating currency in Ruritania. For centuries,
all countries struggled with calamitous effects of suddenly alternating metallic currencies. First
silver would flow in and gold disappear; then, as the relative market ratios changed, gold would
pour in and silver disappear.
Finally, after weary centuries of bimetallic disruption, governments picked one metal as the
standard, generally gold. Silver was relegated to "token coin" status, for small denominations,
but not at full weight. (The minting of token coins was also monopolized by government, and,
since not backed 100% by gold, was a means of expanding the money supply.) The eradication
of silver as money certainly injured many people who preferred to use silver for various
transactions. There was truth in the war-cry of the bimetallists that a "crime against silver" had
been committed; but the crime was really the original imposition of bimetallism in lieu of parallel
standards. Bimetallism created an impossibly difficult situation, which the government could
either meet by going back to full monetary freedom (parallel standards) or by picking one of the
two metals as money (gold or silver standard). Full monetary freedom, after all this time, was
considered absurd and quixotic; and so the gold standard was generally adopted.
B. Legal Tender
How was the government able to enforce its price controls on monetary exchange rates? By a
device known as legal tender laws. Money is used for payment of past debts, as well as for
present "cash" transactions. With the name of the country's currency now prominent in
accounting instead its actual weight, contracts began to pledge payment in certain amounts of
"money." Legal tender laws dictated what that "money" could be. When only the original gold or
silver was designated "legal tender," people considered it harmless, but they should have
realized that a dangerous precedent had been set for government control of money. If the
government sticks to the original money, its legal tender law is superfluous and
unnecessary. On the other hand, the government may declare as legal tender a lower-quality
currency side-by-side with the original. Thus, the government may decree worn coins as good
as new ones in paying off debt, of silver and gold equivalent to each other in the fixed ratio. The
legal tender laws then bring Gresham's Law into being.
When legal tender laws enshrine overvalued money, they have another effect; they favor
debtors at the expense of creditors. For then debtors are permitted to pay back their debts in a
much poorer money than they had borrowed, and creditors are swindled out of the money
rightfully theirs. This confiscation of creditors property, however, only benefits outstanding
debtors; future debtors will be burdened by the scarcity of credit generated by the memory of
government spoilation of creditors.
Many debasements, in fact, occurred covertly, with governments claiming that they were merely
bringing the official gold-silver ratio into closer alignment with the market.
"The ordinary law of contract does all that is necessary without any law giving special functions
to particular forms of currency. We have adopted a gold sovereign as our unit.... If I promise to
pay 100 sovereigns, it needs no special currency law of legal tender to say that I am bound to
pay 100 sovereigns, and that, if required to pay the 100 sovereigns, I cannot discharge my
obligation by paying anything else." Lord Farrer, Studies in Currency 1898 (London: Macmillan
and Co, 1898), p. 43. On the legal tender laws, see also Mises, Human Action, (New Haven:
Yale University Press, 1949), pp. 32n. 444.
Gresham's Law Under Bimetallism
An understanding of Gresham's Law was crucial to the formulation of a correct monetary policy,
and it turned out to be especially important under bimetallism. Bimetallism was a system in
which one of more countries fix the prices of two of the precious metals in terms of the national
currency unit, thus fixing the bimetallic ratio. In the following discussion, I shall assume that the
two metals are gold and silver, but the theory applies equally to other metals.
Consider the operation of Gresham's law under bimetallism. Its principles can be studied best in
the context of a small country facing a bimetallic price ratio in the rest of the world over which
they had no influence. This was not far from the actual situation facing many countries between
the end of the Middle Ages until 1873, when bimetallism gave way to the gold standard. To fix
ideas suppose the bimetallic price ratio is 15:1, and that there is free coinage in the sense that
people can bring either of the metals to the mint to be coined..
Suppose now that a new small country arrives on the scene and it sets its bimetallic ratio at
15:1. At this ratio the mint price of gold is lower and the mint price of silver is higher than the
world price. In this situation, silver will be brought to the mint to be coined, but no one will bring
gold to the mint when its price is lower there than it is abroad.
There would be perpetual disequilibrium if the market price ratios at home and abroad remained
different. Equilibrium can exist only when the market price of gold at home has risen to the
international level of 15:1, which is possible only when all the gold has left the country and the
circulation is entirely silver. By overvaluing silver, the country, while nominally bimetallic, has put
itself onto a de facto silver standard. Overvaluing a metal makes it "bad money" and brings
Gresham's Law into play.
The standard of a country could also be affected by a change in supply conditions in the
precious metals industries. This happened to France in the 1850s. As we have seen France
was theoretically on a bimetallic standard at a ratio of 15:1 from 1803 until 1870, but in fact
most of its currency in circulation was silver. But in the middle of the century there came large
gold discoveries: Russia in the 1840s, and the United States and California in the 1850s. This
lowered the market price of gold below the French buying price with the result that France
exchanged its silver for a gold currency. Gresham's law applies here also because the new
supply conditions made gold the overvalued metal in France.
An equally famous example concerned Britain's movement toward the gold standard in the 18th
century. The recoinage of the late 1690s had been a failure. Before the recoinage was
complete, drawing on a report that was signed by Locke among others, the House of Commons
established (54) a ratio of 15:1 at a time when the ratio in Holland (which at that time was the
center for the precious metals markets) was 15:1; this was accomplished by rating the gold
guinea at 21 instead of 22s. As a result about a 5 percent profit could be made by importing
gold and having them minted into guineas, with the result that gold came to Britain and most of
the newly-coined silver was exported.
The models established above have assumed a small country faced a given bimetallic ratio in
the rest of the world. This assumption, while simplifying the exposition, is by no means
necessary. More generally the bimetallic ratio is determined by the interaction of the demands
and supplies of the two metals in all the countries in the system. Bimetallism usually requires
that at least one large country fix the ratio. Only a large country could "command" the ratio for
any length of time; two or more large countries could ensure that it lasts even if their legal ratios
were slightly different. Suppose that a large country fixes the ratio at 15:1 while other
countries choose the same or different ratios. If the 15:1 ratio is consistent with market
conditions, the large country will be on a bimetallic standard. Those countries that have fixed the
ratio below that rate will have overpriced silver and put themselves on a silver standard;
whereas those that have chosen a higher ratio will be on a gold standard. In a world of
bimetallism, pluralism is the rule rather than the exception with some countries truly bimetallic,
others on silver, and others on gold.
10. Overvalued Money and the Institution of Legal Tender
One important distinction between types of money is whether it is legal tender or not. Gresham's
Law can come into play if two types of money are equivalent except in their role as legal tender.
Very soon after coinage was discovered, rulers learned that the demand for money was
different from the demand for the metal contained in the coins. Coinage began in steps that
started when the state first put a stamp on a piece of metal signifying its purity, weight, and/or its
value. It is possible that, initially, the value stated on the coin (its face value) was equal to the
value of the metal it contained (its value by weight). But in the absence of a mechanism for
ensuring that a coin had the same value qua metal that it had qua money--free coinage was one
mechanism--the face value of the coin would become different from the coin's value as metal. A
coin was said to be accepted ad talum (by count) if it was accepted at its face value; and it was
said to be accepted ad pensum (by weight) when it was accepted for its value in metal.
When a currency must be accepted at its face value for payment of debt--whatever its
commodity value--it is said to be legal tender. What is the meaning of this term? It should be
noted first that it is a legal term. The institution of legal tender is a "term of avoidance" of the
courtroom, in which a defendant might admit to borrowing money from his accuser, but plead
"legal tender," namely, that at some previous time he physically had offered his creditor money
which the law deemed acceptable for debt payments and had been refused. The court might not
aid in the recovery of money once it had been turned down. The term legal tender is now used
for a currency that cannot legally be refused in payment of debt. Other things equal, the attribute
of legal tender would make one money "good" relative to another money.
There is a question issue whether the concept of legal tender is a term of private or public law.
In his Money in the Law (1950), Nussbaum writes: The question of the extent to which a
creditor is under a duty to take "legal tender" in payment is undoubtedly one of private law. The
endowment of coins or notes with the character of legal tender is, however, an act of
sovereignty, hence of public law. In other words the sovereign determines that which
constitutes legal tender but its enforcement in the courts is a matter of private law.
The concept of legal tender suggests a distinction between two types of money: refusable
money and non-refusable money, the latter of course being legal tender. In a typical country in
the modern world, for example, currency is non-refusable money, cheques are refusable
money, and coins are non-refusable money only up to a limit.
In earlier times, it was generally true that the proclamation of a new coin implied its legal tender
status at the face value. When a new coin was issued with the same name (e.g., penny, ecu,
florin) but a lower weight or purity implying devaluation or debasement the question of justice
arises between creditors and debtors. Should a debt be paid in the legal tender at the time of
contract or at the time of repayment? This subject has given rise to endless controversy. Its
relevance was made very apparent in the 1930s when Federal Reserve notes were made legal
tender and the US dollar was devalued. The main issue was whether a gold clause in a contract
would be legally binding (it was not).
Long ago the ancients had to deal with analogous questions. Argentum is a Latin word for both
money and silver. Was a debt payable in argentum payable in silver or in legal tender? Cicer
thought it was the latter:
in our law we carry out the reasoning of Cicero, who held that argentum (in French, argent, or
silver) meant money, and not metal. . . It follows that the efficacy of money is due to the value
imposed on it by law, a fact deducible from its Greek namenomos and its Roman name
nummus, both of which mean the Law, or that which is created by the law. It is the law that
gives existence and efficacy to money and not the material of which the coins are made. Thus,
says Paulus, to the Crown only (the Crown or the State being the living impersonation of the
Law) belongs the right to confer denominational value upon money. Such value has often
exceeded the value of the material two or three, or more, times, as was manifested in the
leather issues of Frederick Barbarossa, the tin issues of Dionysius of Syracuse, the gun metal
issues of the Sultan Othman (AD 1259-1326) during the wars against Persia, and in our own
copper coins.
That "argentum" meant money rather than just silver is amply proved by the following examples:
"argentari tabern, banker's shops (Livy); argentaria inopia, want of money (Plautus);
argentarius, tresurer (Plautus); argentei sc. Nummi, or money (Pliny, xvi, 3); ubi argenti venas
aurique sequuntur (Lucretius, vi, 808); cum argentum esset expositum in dibus (Cicero);
emunxi argento senes (Terrence); concisumargentum in titulos faciesue minutas (juvenal, xiv,
291; tenue argentum venque secund (ibid., ix, 31).
The power of legal tender confers on its owner (the sovereign or government) a fiscal resource
of the first magnitude. In the ancient world, as suggested in above quotation from Grimaudet,
this power was used to overvalue money and reap the benefits of seigniorage, sometimes but
not only in great emergencies.
11. The Evidence from Hoards
The study of hoards is one of the most interesting if recent applications of Gresham's Law. Ever
since coinage was created, coins have been collected and sometimes buried as hoards, which
resurface for the enlightenment and controversy of later generations of archaeologists,
numismatists, historians and economists. Sometimes the finds have been merely
spectacular whereas otherwise--like the great discovery of electrum coins in the Temple of
Artemis at Ephesus--they have yielded priceless historical information.
Hoards found in the ground have typically been those that have been buried in the past with the
intention, but not the realization, of future recovery. Three questions deserve to be asked: (1)
Why are hoards created in the first place? (2) Why are they buried? (3) What determines their
composition? We can answer these questions in turn.
(1). Collections of coins may exist for a number of reasons, including numismatic interests;
Augustus Caesar, for example, was an avid collector. Nevertheless, the main function of hoards
is as a store of value, a form of saving, which reflects a desire to preserve wealth for future use.
Moreover, hoards are typically a form of liquid wealth, ready cash that is available for use in
contingencies. Hoarding always reflects a desire to sacrifice current consumption for the
prospect of future consumption.
(2) Hoards are buried because of a real or imagined threat to security. The best proof is that
hoarding intensity--measured by the frequency of hoards found--increases during civil wars. In
Roman history, for example, hoards increased dramatically during the Second Punic War, c.
218-206 BC, and then again during the Social War, the Civil War and the Spartacus revolt, c.
90-71 BC, and once again during the Civil Wars, c. 50-31 BC. A similar pattern existed in Britain
where hoarding frequency soared during its Civil War period c. AD 1625-49. It is probable that
this pattern will be confirmed in similar cases.
(3) The composition of hoards is determined partly by Gresham's Law. Assume that the money
supply of a country consists of both overvalued and undervalued coins. Let us now suppose that
hoarding intensity increases. By Gresham's Law it is the undervalued coins that will disappear
and the overvalued coins will remain. The profit motive will ensure that the best coins end up in
hoards.
An effective application of Gresham's Law to the study of hoards was made by Sture Bolin in a
pioneering work on the Roman monetary system. Drawing on work spanning more than two
decades, Bolin published in 1958 a comprehensive study of 150 coin hoards from the period AD
69 to approximately AD 250, found in widely separated parts of the Roman Empire and
containing over 82,000 denarii from the Republic and Empire up to the year 193. It is of course
well known that the denarius was progressively debased over this period, and this fact should
have affected the proportion of old to new (depreciated) coins in the collections. Among his
striking findings was the vast number of coins from the Republic in the hoards collected in
Germany, the Balkans and Britain, confirming what Gresham's Law would predict, that the outer
parts of the empire preferred the relatively undervalued denarii.
The composition of hoards sometimes offers clues about circulation. Other things equal, a large
preponderance of coins is, say, the reign of Hadrian or Vespasian would suggest a large
production. On the other hand, a low frequency of a ruler's coins does not necessarily imply low
production; if it were overvalued, it would not be a suitable candidate for hoards. The worst
coins circulate, the best coins end up in hoards.
Given the frequency of hoards discovered, which number in the thousands, empirical analysis
can be brought to bear, yielding rigorous statistical inferences that can be used to test the
presence of absence of Gresham's Law
Gresham law in corporate finance
Greshams law. Two currencies, corporate securities (bad money) and cash (good money)
circulate together with the former playing the dominant role of par money in times when
investors exhibit irrational enthusiasm. Heightened social pressure in the form of herding
combined with greater uncertainty about the degree and duration of the overvaluation of
securities jointly play the role of transactions costs creating a preference for payment in the par
money and most deals are financed with equity or debt securities rather than cash. To illustrate,
overvalued bank loans were the most common form of financing in the credit bubble up to 2008
while stock deals predominated in takeover financing during the Internet bubble period of the
late 1990s. Normal markets, not characterized by irrational enthusiasm, display the use of both
corporate securities and cash in funding takeovers with cash deals (good money) enjoying a
premium in the form of more favorable stock market reaction. The analysis provides useful
insights for both monetary economists and researchers in corporate finance. For the former, it
brings a fresh currency to the interpretation and extension of Greshams law relating the classic
debate to contemporary, as opposed to historical, events. For the latter, the lesson is that
principles of monetary economics can enhance understanding of corporate financing choices.
Summary and Conclusion:
During the reign of Queen Elizabeth, they introduced new coins in the country with the
hope that the old and bad coins would disappear. But it surprisingly, the Queen and her
advisers had known that the new coins disappeared from circulation and the old coins continued
to be in circulation as before. Then, it statted the popular explanation or statement that Gresham
used to explain the situation by telling that bad money drives good money out of circulation. So
the law has come to be known as Greshams law. Another explanation of this law is that: Coins
were made with gold, silver, also other precious metals, that gave them their value. But as time
goes by, if the amount of metals worth more than their own than when it is minted, the coins
decreased because the metals used to make them were having higher value. Then on the other
hand, if the value of the metal is higher than the coins face value, people keep minting the coins
and selling them. Greshlam law can help us figure out the changes in our money supply.
Oversupply of money is equal to the abrupt increase in prices. Scarcity of money is associated
with a rise in the price of money, whereas an abundance of money is associated with a fall in
that price. In other words, money prices fall when money is scarce, and money prices rise when
money is abundant. Gresham Law, however will work only if there are sufficient supply of
money circulating in the society in necessary exchanges. Good money will not be hoarded or
exported if there is insufficient or scarcity of money in country and is generally used for business
transactions and exchanges. Similarly, bad money cannot drive good money out of circulation,if
the people as a whole refuse to accept it as a medium of exchange.
Gresham's Law, can be a a useful tool for historians for the study of the monetary history. The
popular phrase, "bad money drives out good," is not a correct statement of Gresham's Law.
Because throughout history, the opposite has been the case. The laws of competition and
efficiency ensure that "good money drives out bad." The great international currencies--shekels,
darics, drachmas, staters, solidi, dinars, ducats, deniers, livres, pounds, dollars--have always
been "good" not "bad" money. Also, in the history it has been good, strong currencies that have
driven out bad, weak currencies. Over the span of several millennia, strong currencies have
dominated and driven out weak in international competition. The Persian daric, the Greek
tetradrachma, the Macedonian stater, and the Roman denarius did not become dominant
currencies of the ancient world because they were "bad" or "weak." The florins, ducats and
sequins of the Italian city-states did not become the "dollars of the Middle Ages" because they
were bad coins; they were among the best coins ever made. The pound sterling in the 19th
century and the dollar in the 20th century did not become the dominant currencies of their time
because they were weak. An acceptable expression of this is "Good money drives out bad if
they exchange for the same price"
Lastly, Suppose there are many old coins. The government may introduce new coins to replace
the old coins, which are worn out. If new coins are introduced, old coins will not disappear. On
the other hand, new coins will go out of circulation. There are many reasons for the operation of
the law. First, generally people like to retain a new coin instead of an old one for they think that
the new one is attractive and more valuable. This applies to children as well as to adults.
Second, if both bad and good coins are in circulation, people will hoard the new coins. They will
melt them and sell them as metal because as metal those coins will have a greater value than
their face value. The law applies to bimetallism too. In fact, the operation of the law is one of the
difficulties of bimetallism.
Exchange Rate
Exchange Rate is the price of a nations currency in terms of another currency. An exchange
rate thus has two components, the domestic currency and a foreign currency, and can be
quoted either directly or indirectly. In a direct quotation, the price of a unit of foreign currency is
expressed in terms of the domestic currency. In an indirect quotation, the price of a unit of
domestic currency is expressed in terms of the foreign currency. An exchange rate that does not
have the domestic currency as one of the two currency components is known as a cross
currency, or cross rate. Also known as a currency quotation, the foreign exchange rate or forex
rate/
ABOUT CURRENCY EXCHANGE RATES
Sell rate this is the rate at which we sell foreign currency in exchange for local currency. For
example, if you were heading to Canada, you would exchange your currency for Canadian
dollars at the sell rate.
Buy rate this is the rate at which we buy foreign currency back from travellers to exchange
into local currency. For example, if you were returning from America, we would exchange your
dollars back into euros at the buy rate.
Holiday money rate or tourist rate another term for a sell rate.
Spot rate This is known more formally as the interbank rate. It is the rate banks or large
financial institutions charge each other when trading significant amounts of foreign currency. In
the business, this is sometimes referred to as a spot rate. It is not the tourist rate and you
cannot buy currency at this rate, as you are buying relatively small amounts of foreign currency.
In everyday life it is the same as the difference between wholesale and retail prices. The rates
shown in financial newspapers and in broadcast media are usually the interbank rates.
Spread This is the difference between the buy and sell rates offered by a foreign-exchange
provider such as us.
Cross rate This is the rate we give to customers who want to exchange currencies that do not
involve the local currency. For example, if you want to exchange Australian dollars into US
dollars.
Commission This is a common fee that foreign-exchange providers charge for exchanging
one currency to another.
WHAT FACTORS INFLUENCE EXCHANGE RATES - BUSINESS FOREIGN EXCHANGE
by Spencer Davies
Many factors influence exchange rates and an accumulation of various things drive market
movement.
As the currency market is so volatile it can appear to be a little daunting at first, but its important
to be aware of the major market movers as these can have short and long-term effects. Here
are some of the more important factors to watch out for:
Interest Rates
There is a strong correlation between the interest rates imposed by a nations central bank and
exchange rates. Interest rates have the power the increase or decrease the value of a currency,
and even hints that interest rates will be cut or hiked can be enough to have a serious impact.
Higher interest rates offer lenders a higher return on their investments relative to other nations.
This then attracts foreign capital which causes the exchange rate to rise. However, if inflation is
higher than in other related countries, the exchange rate will be driven down.
Economic Growth
You are essentially investing in a country when you buy its currency. When a countrys
economy grows in strength more people want to invest in that country and the currency can
strengthen as a result. Similarly, if a countrys economy contracts, people want to sell assets
connected to that country and its currency can fall.
Geo-Politics
A countrys economic stability is another very important factor which can influence the value of a
currency. This is due to people wanting to safeguard their money. In general, the more unstable
the economy of a country is, the less investment in it there is likely to be this inevitably
devalues that countrys currency.
Trade Balance
A countrys trade and capitals flows, or the trade balance of a countrys imports relative to their
exports, will affect its currencys value. The more a country exports, the more businesses
demand that countrys currency which can then drive the currency upwards.
Where to look for market moving events?
In order to keep track of global events, traders will follow the economic calendar. There are
various sources online where you can obtain a copy on a weekly basis.
Here are a few indicators to look out for when scrolling through your economic calendar.
CPI This stands for Consumer Price Index
CPI is a monthly measurement of a countrys inflation. Central banks look to this to gage
how effective their policies have been.
Consumer Confidence
These are surveys taken from numerous households within each country asking
questions about income and their view of the domestic economy as a consumer.
Employment
This shows the percentage of the population that is in (or out) of work. This is an
essential indicator for the health of the economy.
Non- Farm Payrolls (USA)
This is a measure of employment which excludes the agriculture sector. This can be a
good indicator on whether the USs current monetary policies are being effective.
Retail Sales
This shows how inflation has influenced the sales of retail outlets through consumer
spending.
PMI
A Purchasing Managers Index looks at current business conditions within the economy
by surveying influential purchasing managers in each country. It covers various
contributors to the health of the economy e.g. views on employment, inventories, prices
and production levels etc.
Manufacturing and Service Sector Production
These make up most of the production levels of a nation and give an insight into the
state of the countrys economy.
GETTING THE BEST EXCHANGE RATE
by Samuel Allen
If you have a high volume foreign currency transfer to make and want to be assured of
the best exchange rate there are a few techniques you can employ to achieve this.
Whether it is a one off payment or you make more regular foreign currency transfers, in
order to achieve the best exchange rate it is important firstly to be dealing with the right
people. A specialist foreign exchange broker will be able to guide you through the
process, they will have lower transaction costs than the bank, they also provide a quick
and safe transfer of your funds.
It is important first to look at the timescale of your foreign exchange transfer, having time
to play with is always a good thing but its what you do with that time that makes the
difference between achieving the best exchange rate and the worst exchange rate. The
foreign exchange markets are very volatile, they trade 24 hours a day, 6 days a week
and any financial data globally can create fluctuations in the rate of exchange.
With so much information available on the internet it can sometimes get quite confusing
but a few basic points can help anyone to achieve better exchange rates for money
transfers abroad. Firstly it is important to identify the current trend of the currency you
are looking to convert, the easiest way to achieve this is to look at a chart tracking the
previous exchange rate movements. There are usually a few different trends, a long
term trend (yearly) medium term trend (monthly) and short term trend (daily)
It depends how quickly to require your foreign exchange transfer as to which timescale
you should be looking at. If you need to make a transfer in the next few days, look at the
daily trend, if it's moving in your favor then its worth hanging on for a bit but as soon as
you see the rate of exchange start to fall away, give your currency broker a call and book
the rate. You could also put an automatic buy order known as a 'limit' order with your
broker so they watch the market for you. This will save you time and effort.
If you have a much longer timescale then the same rule applies, if the trend is against
you then to achieve the best exchange rate it might be better to buy sooner rather than
later. If you have a requirement but don't have all the money to fund it then you can be
guaranteed the rate of exchange by booking a 'forward contract', this allows you to fix
the rate of exchange on a margin deposit.
Market trends can be very useful and can go a long way to achieving the best rate of
exchange for your currency transfer. The next method which can be used in conjunction
with trend analysis is to look at areas of support and resistance in the market. Say you
are looking to buy Euros, the foreign exchange market is trading currently at 1.1300, the
medium term trend is up, so you decide to hang on. The exchange rate might continue
to rise for a while but then it starts to drop down quickly and before you have a chance to
buy it has dropped another point. The reason this has happened is because the rate of
exchange has reached a point of resistance in the market.
Points of resistance, in the context of an uptrend, are levels the market has reversed at
before. Forex traders place orders in the market at these levels and that's why the rate of
exchange can reverse. The best way to make the most of them is to place a limit order
just below these levels so you can be guaranteed the rate of exchange as soon as the
market trades there.
A foreign exchange broker will be able to help you with all these techniques. They will be
aware of the trends in the market and the levels of support and resistance. A good
foreign exchange broker will do everything they can to get you the best rate of exchange
for your foreign exchange transfer.
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perspectives/volume/1/issue/2/greshams-law-in-corporate-finance_36.html
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