History has it that trade flows have occurred due to the supply and demand between the territories and nations depending upon the nature of goods each country possess and correspondingly each country prefers. This trade flow has been occurring because of the resource constraint and the need to get access to the commodity. However, there hasn’t been any such mode where equivalent transaction could be carried out in order to bring balance in trade.
It’s in the human’s inherent nature to innovate so as to live better than their predecessors. People of now definitely live a better life than the people a couple of millenniums ago. Hence, this need of a balance in trade brought innovation such as the barter system, where in, the people trade a part of their produce with other people willing to carry out the trade. However, complications emerged due to the preference in human nature for a particular good leading to chaos and confusion over the choice and quantity of good to be traded (Forbes, 2014).
Thus the concept of exchange of goods over the gold emerged and widely accepted. All commodities traded were valued and transacted over the gold or other equivalents such as copper and lead coins denominated and linked to gold. Trading over commodities became simple and balance of payments was carried out easily due to the availability of value in terms of gold or its equivalents. Maritime sector too, due to the technological advances, started to during the period of gold standard due to the wave of globalization (1870-1914) leading to increase in trade across the nations.
Soon, in the year, 1717, Sir Isaac Newton, pegged British Currency Notes to gold in order to prevent people from hoarding the precious metal which not only proved destructive to trade thus affecting the maritime sector too, but it catapulted towards difference in economy due to the ruin caused by it (Forbes, 2014). Now, the central bank could be approached for paper cash in return for gold. In the following years several nations pegged their currencies to gold leading to currency exchange with respect to the value pegged against the gold (Forbes 2014).
Stability and order of the day followed with few, local frictions in the economy, which otherwise, had been more or less stable. Growth, however, has been linked due to the innovation done my humans over the period such as the steam locomotive, the telegraph and cotton-spinning machine. However, the two World Wars, [World War I- (1914-1918)] and [World War II – (1939-1945)] disrupted the economy turning around to unstable economy followed by high inflation. Several trade barriers were also imposed during the interwar period, which led to Great Depression in United States of America and hyperinflation in Germany. Trade in the maritime sector too got affected due to the volatility in money thus leading to downsizing and mass unemployment.
Post Second World War, all the nations, under the Bretton Woods System, decided to link Dollar to Gold Standard at $35/Ounce followed by the currencies of the remaining nations linked to dollar. However, this system remained until 1971, when President Richard Nixon, removed dollar from the Gold Standard or floated the dollar in order to support US during the Vietnam War; remaining currencies linked to the dollar thus leaving these nations at the mercy of US monetary policies.
US Monetary policy mostly depends on debt inflation. Huge borrowing and massive spending has brought the Federal debt of US to 13.8 trillion dollars in the financial year 2010, which is highly exorbitant (Joshua Aizenman, Nancy Marion, 2011). The policies generated by US brings huge volatility in the market thus disrupting trade flow leading to massive crisis (Chain-Reaction) such as the 1997 crisis, followed by the replacement of Glass-Steagall Act by Gramm-Leach-Bliley Act in 1999 and internet bubble in 2000 leading to the major crisis in 2008 from which recovery has been extensively slow. Europe is grilling under deflation due to lack of investments, which is leading to quantitative easing by the European Central Bank. But money is a measurement of value and not the value itself. Such policies not only affects the domestic market negatively but also ruins the chance of entrepreneurs and other like minded people of bringing innovation into the society, which are capable of adding value to the society. Important innovations are the need of the day and missing these as such will hamper the economy which is not doing good either with these monetary policies (Forbes, 2014). Volatility as such highly affects the maritime sector, which would dwell under constant fear of not getting the right price for the value of the cargo due to the change in monetary policy, which would be impossible if the currencies aren’t floating.