Gold standard is a monetary system in which the standard unit of currency is a fixed quantity of gold or is kept at the value of a fixed quantity of gold.

1. GOLD STANDARD

2. GOLD STANDARD
• Gold standard is a monetary system in which the standard unit
of currency is a fixed quantity of gold or is kept at the value of a fixed
quantity of gold. The currency is freely convertible at home or abroad into a
fixed amount of gold per unit of currency.
• In an international gold-standard system, gold or a currency that is
convertible into gold at a fixed price is used as a medium of international
payments. Under such a system, exchange rates between countries are
fixed; if exchange rates rise above or fall below the fixed mint rate by more
than the cost of shipping gold from one country to another, large gold
inflows or outflows occur until the rates return to the official level.

3. PRINCIPLES GOVERNING GOLD STANDARD
a) There should be free movement of gold between countries;
b) There should be automatic expansion or contraction of currency
and credit with the inflow and outflow of gold;
c) The governments in different countries should help facilitate the
gold movements by keeping their internal price system flexible in
their respective economies.

4. HISTORY
• The gold standard was first put into operation in Great Britain in 1821. Prior to this
time silver had been the principal world monetary metal; gold had long been used
intermittently for coinage in one or another country, but never as the single
reference metal, or standard, to which all other forms of money were coordinated
or adjusted.
• For the next 50 years a bimetallic regime of gold and silver was used outside Great
Britain, but in the 1870s a monometallic gold standard was adopted by Germany,
France, and the United States, with many other countries following suit.
• This shift occurred because recent gold discoveries in western North America had
made gold more plentiful. In the full gold standard that thus prevailed until 1914,
gold could be bought or sold in unlimited quantities at a fixed price in convertible
paper money per unit weight of the metal.

5. ADVANTAGES OF GOLD STANDARD
 It was an easy system to introduce and operate.
 It provided for a very high level of stability in exchange rates which
promoted both international investments and trade.
 The Price Specie Adjustment Mechanism provided an in-built
system for achieving trade equilibrium.
 It provided a fully secured system for settlement of international
transactions.

6. DISADVANTAGES OF GOLD STANDARD
 The cost of manufacturing gold gradually increased to levels beyond the
official prices. This would result in stoppage of gold production which
had an adverse effect on international liquidity.
 Countries with persistent trade deficit suffered from recessions resulting
in reduced investments and unemployment.
 The system had no flexibility to adjust money supply in times of
economic crisis such as natural disasters, war, recession etc. In such
situations the system had to be repeatedly discontinued.
 To avoid the negative effects of reduced money supply, countries would
break the equality between gold reserves and money supply, thereby
diluting the system.

7. FAILURE
 Before World War I, gold standard worked efficiently and remained widely
accepted. It succeeded in ensuring exchange stability among the countries.
 But with the starting of the war in 1914, gold standard was abandoned
everywhere mainly because of two reasons:
 to avoid adverse balance of payments and
 to prevent gold exports falling into the hands of the enemy.
 After the war in 1918, efforts were made to revive gold standard and, by
1925, it was widely established again. But, the great depression of 1929-33
ultimately led to the breakdown of the gold standard which disappeared
completely from the world by 1937.

8. REASONS FOR FAILURE
 Violation of Rules of Gold Standard
 Restrictions on Free Trade
 Inelastic Internal Price System
 During the inter-war period, the monetary authorities sought to
maintain both exchange stability as well as price stability.
 This was impossible because exchange stability is generally accompanied
by internal price fluctuations.
 Unbalanced Distribution of Gold
 External Indebtedness

9.  Excessive Use of Gold Exchange Standard
 Absence of International Monetary Centre
 Lack of Co-operation
 Political Instability
 Great Depression
Falling prices and wide-spread unemployment were the fundamental
features of depression which forced the countries to impose high tariffs
to restrict imports and thus international trade.
 Rise of Economic Nationalism

10.  Under the classical gold standard, from 1870 to 1914, the international
monetary system was largely decentralized and market-based.
 There was minimal institutional support, apart from the joint commitment of
the major economies to maintain the gold price of their currencies.
 Although the adjustment to external imbalances should, in theory, have been
relatively smooth, in practice it was not problem-free.
 Surplus countries did not always abide by the conventions of the system and
tried to frustrate the adjustment process by sterilizing gold inflows.
 Deficit countries found the adjustment even more difficult because of
downward wage and price stickiness.
 Once the shocks were large and persistent enough, the consequences of
forfeiting monetary independence and asymmetric adjustment ultimately
undermined the system.

11. SUMMARY
a) The reign of the full gold standard was short, lasting only from the 1870s to
the outbreak of World War I. That war saw recourse to inconvertible paper
money or to restrictions on gold export in nearly every country.
b) By 1928, however, the gold standard had been virtually re-established,
although, because of the relative scarcity of gold, most nations adopted a gold-
exchange standard, in which they supplemented their central-bank gold
reserves with currencies that were convertible into gold at a stable rate of
exchange.
c) The gold-exchange standard collapsed again during the Great Depression of
the 1930s, however, and by 1937 not a single country remained on the full gold
standard.

12. THANKS