The value of money

[Trabpukcip]

I'm currently reading "Das Kapital" of the distingished comrade Marx. In it he talks about how the value of money is established from the value of gold. I do know that we no longer use that method, but I don't know exactly how it's done now. I beleive it has something to do with the general production of a country, but nothing precise. Does anybody know how it is done? And is it all the same for all countries? And what about the european money?

Thanks for your help...

...and while I'm at it... when did we change system?

 

[jack merchant]

The system changed in 1971, when the Bretton Woods system collapsed. Bretton Woods was a kind of derived gold standard; all Western currencies were linked to the dollar with the dollar convertible into gold at a fixed rate of $35/oz backed by the American gold reserve. As any fixed exchange rate system, it was highly vulnerable to speculation (as occasionally currencies had to be revalued or devalued).

Right now, there is basically nothing underpinning the value of money except the full faith and credit of governments; what determines its value is basically how much there is of it in relation to how much is needed to keep the economy going. If there is too little of it, the value of money will go up, but more commonly there is too much of it and its value goes down (inflation).
Here's some background on the money supply and its implications. (this refers to the American situation, but it's much the same in other countries and the Euro-zone).

 

[The Yankee]

I would imagine the value of monies would be done through supply and demand and through trading (imports v. exports). Oh whatever....all I know is that I need $1.25 to get a 20 ounce bottle of Pepsi downtown.

 

[Mrogreturns]

@Jack Merchant- I've heard of the concept of using the Big Mac hamburger as a way of assessing the relative value of diffrent curencies. The idea being that, as a Big Mac is esentially identical in every country it is sold, you can use its's price to compare currencies. I remember that according to this comparison the Australian dollar, for example, is grossly undervalued relative the the U.S dollar.

Perhaps it is too involved for you to give an explantion for the discrepency here- but is is a potential problem?

 

[ShiplordAtvar]

Originally posted by Mrogreturns
The idea being that, as a Big Mac is esentially identical in every country it is sold, you can use its's price to compare currencies.

Out of curiousity, does this include possible variations in costs to produce the Big Macs?

 

[warmonger]

The Economist magazine runs the Big Mac index. They ignore any differences in production cost. It started as a joke some years ago and has actually turned into one of the best long term indicators of currency exchange rates.

You'll find it in the back two or three pages of their publication on a regular basis.