To get there, you need to get past the discussion of sterilized currency operations by central bank.
In an unsterilized operation, the Fed (or other central bank operating in its own currency) simply monetizes (issues new money) to purchase the currency of another country. In effect, the number of dollars in the world increases, which under the assumptions of monetarist theory is inflationary.
In a sterilized operation, the Fed buys, say, $100,000 worth of foreign currency and simultaneously sells a bond worth $100,000. Money goes "out" of the Fed (to buy currency) and simultaneously comes "in" to the Fed (as an investor pays for the bond). The number of dollars in circulation is kept constant, so in Fed monetarist thinking there will be no inflation as a result of the operation.
The purchase of foreign currency by a central bank, using its own currency, builds up "foreign reserves." These can be sold again later, which has a small impact on raising the price of the central bank's own currency. Gold can be used for the same kinds of operations, quite independently of whether or not there is a "gold standard peg."
Many bof the world's central banks hold their foreign reserves in the form of bonds issued by other governments. US Treasuries are very big.
Greenspan suggest that sterilized operations don't really have much effect on currency rates becaue a $100,000 US bond is really, for all practical purposes, as liquid as $100,000 cash.
-gn. -- Gregory P. Nowell Associate Professor Department of Political Science, Milne 100 State University of New York 135 Western Ave. Albany, New York 12222
Fax 518-442-5298
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