refers to the type of standard money used in an economy.
The standard money, of course, is that legal money in which
the government of the country itself discharges its obligations.
refers to the overall set of laws and practices which control
the quality and quantity of money in a country. The standard
money of a country which determines and regulates the
exchange value of goods and services.
(Gold & Silver)
Under metallic standard, the monetary unit is determined in terms of
some metal like gold, silver, etc. Standard coins are made out of metal.
Metallic standard may be of two types:
Monetary unit is made up or convertible to only one metal. Only one
metal is used as standard money whose market value is fixed in terms of
a given quantity and quality of the metal.
Since only one metal is used as a standard
value, Monometallism is simple to operate and easy to understand.
Confidence: The standard money is made of a precious metal, it
inspires public confidence.
Foreign Trade: It facilitates and promotes foreign trade. Gold or
silver standard is easily acceptable as an international means of payment.
• Avoids Gresham’s Law: It avoids the operation of Gresham’ Law. According
to this law, when both good as well as bad money exist in the economy, bad
money tends to drive out of circulation good money.
– operative: It makes the supply of money self operative. If there is
surplus money supply, the value of money will fall and the people will start
converting coins into metal. This will wipe out the surplus money, thus creating
Standard: It is a costly standard and all countries, particularly
poor countries cannot afford to adopt it.
Elasticity: Money supply depends upon the metallic reserves.
Thus, the money supply cannot be changed in accordance with the
requirements of the economy.
Economic Growth: Economic growth requires expansion of
money supply to meet the increasing needs of the economy. But, scarcity
of metal may create scarcity of money supply which, in turn, may hinder
Price Stability: Since the price of the metal cannot remain
perfectly stable, the value of money lacks stability.
The monetary unit is defined in terms of silver. The standard coins are
made of silver and are of a fixed weight and fitness in terms of silver.
The silver standard remained in force in many countries for a long
period. India remained on silver standard from 1835 to 1893. during this
period, Rupee was the standard coin and its weight was fixed at 180
grains and fitness11/12.
The coinage of the Rupee was free and people can get their silver
converted into coins at the mint. Similarly, coins could be melted into
Silver standard lacks universal recognition as compared to Gold
standard. There is greater instability of both internal and external values
of money because silver price fluctuates more than that of gold.
Gold Standard is the most popular form of monometallic standard. The
monetary unit is expressed in terms of gold. The standard coins
possess a fixed weight and fitness of gold.
The gold standard remained widely accepted in most of the countries of
the world during the last quarter of the 19th century and the first quarter
of the 20th century.
The U.K was the first country to adopt the gold standard in 1816. It was
also to abandon this standard in 1931.
Germany adopted the gold standard in 1873, France in 1878 and the
USA in 1900.
Gradually, gold standard disappeared from different countries and
finally it was completely abandoned by the world by 1936.
Bimetallism is a monetary system which attempts to base the currency
on two metals.
According to Chandler, “A bimetallic or double standard is one in which
the monetary unit and all types of nation’s money are kept at constant
value in terms of gold and also in terms of silver”.
Two metallic standards operate simultaneously. Two types of standard
coins from two different metals are minted. Both the types of standard
coins become unlimited legal tender.
FEATURES OF BIMETALLISM
standard is based on two metals, it is the simultaneous
maintenance of both gold and silver standards.
• There is free and unlimited coinage of both metals.
• The mint ratio of the values of gold and silver at the
mint is fixed by
• The face value and the intrinsic value of both the coins are equal.
• There is free import and export of both the metals.
• Both the coins are unlimited legal tenders. They are also convertible
into each other.
full-bodied currency: It provides convenient full-bodied coins
for both large and small transactions. It provides portable gold money for
large transactions and convenient silver money for smaller payments.
Price Stability: Under this system the shortage of one metal can be offset
by increasing the output of the other metal. Consequently, stability in the
prices of both the metals and hence, in the internal prices can be ensured.
• Exchange rate stability: As long as gold and silver are stabilized in terms of
each other, the currencies of all countries with fixed values in gold or in silver
would exchange for each other at nearly constant rates.
money supply: Sufficient money supply is assured to meet the
trade requirements of the economy. Since there is no question of both metals
becoming scarce simultaneously, money supply is more elastic under this
of bank reserves: Under this system, both gold and
silver coins are standard coins and unlimited tender. Therefore, it is
easy for the banks to keep their cash reserves either in gold coins or
in silver coins or in both.
interest rates: Under this standard, money is made of two
metals, its supply is generally more than its demand. As a result, the
interest rates decline. Banks can extend loans at cheaper rates. This
would increase investment and hence production in the economy.
• Stimulates foreign trade: It stimulates international trade in two
ways. (a) A country on bimetallism can have trade relations with both
gold standard and silver standard countries. (b) There are no
restrictions on import and export due to the free inflow of both types of
Operations of Gresham’s Law: According to this law, when there is a
disparity between the mint parity rate and the market rate of exchange of the
two metals, bad money or overvalued metal at the mint (whose mint price
exceeds market price) tends to drive out of circulation good money or under
valued metal at the mint (whose market price exceeds mint price).
Thus, ultimately, single metal money will remain in practice.
Inequality between mint and market rates: Bimetallism can operate
successfully only if the equality between the market rate and the mint rate
can be maintained. But, in practice, it is difficult to maintain equality between
the two rates, particularly when one metal is oversupplied than the other.
Payment difficulties: Bimetallism leads to difficult situation in the
settlement of transactions when one party insists on payment in terms of
particular type of coins.
speculative activity: It encourages speculative activity
in the two metals when their prices fluctuate in the market.
• No stimulus to Foreign trade:
International trade is stimulated if all
the countries adopt bimetallism. But, this is a rare possibility in the
monetary standard: Bimetallism is a costly monetary
standard and all nations, particularly the poor nations, cannot afford to
It refers to a monetary system in which the value of monetary unit or
standard currency of the country is directly formed or linked with gold.
According to Robertson “ Gold standard is a state of affairs in which a
country keeps the value of its monetary unit and the value of a defined
weight of gold at an equality with one another ”
According to Coulborn, “the gold standard is an arrangement where by
the chief piece of money of a country is exchangeable with a fixed
quantity of gold of a specific quality”.
FEATURES OF GOLD STANDARD
• Definition of standard money in terms of gold.
• Gold coins are unlimited legal tender.
• No restriction on import-export of gold.
• Free and unlimited coinage of gold.
• Free and unlimited melting of gold.
• All other types of money (paper money) are freely convertible into gold
or equivalent of gold.
TYPES OF GOLD STANDARD
• Gold Coin standard
• Gold bullion standard
• Gold exchange standard
• Gold reserve standard
• Gold parity standard
GOLD COIN STANDARD
The gold coin or currency standard or the gold specie standard
is the oldest form of gold standard. It is regarded as the
traditional form of gold standard. This standard was prevalent in
U.K, France, Germany and U.S.A before the World War I.
It was a pure form of gold standard, as full-bodied standard
coins made of gold were circulated under this system. Token
coins and other forms of money were to be redeemable into
Monetary unit is defined in terms of gold.
Govt. buys and sells gold at fixed prices and thereby maintains parity
between the face value and intrinsic value of the standard coin.
Coinage is unlimited and free of cost.
Other forms of money are also in circulation and are convertible into gold.
Free and unlimited melting of gold coins.
Free import and export of gold.
Gold is unlimited legal tender for all types of payments. All values are
expressed in terms of gold.
• It enjoys full confidence of the public, as the standard coins are made
of gold and it is universally acceptable.
• Free and unrestricted import-export of gold ensures stability in foreign
exchange rates. This promotes international trade.
• It is automatic working and needs no govt. intervention. Money supply
depends upon the volume of gold reserve and money supply can be
changed in accordance with the changes in the volume of gold
is the simplest form of gold standard which can be easily
understood by the common people.
• It is fair-weather standard. It operates smoothly during peace time but
fails to work properly and to inspire public confidence at the time of
• There is a great problem of wastage of gold. Circulation of gold coins
• Internal price stability is unreal. Various factors like discoveries of new
gold mines, changes in the techniques of production of gold, changes
in imports and exports of gold, lead to changes in the price of
gold, hence cause fluctuations in the internal prices.
GOLD BULLION STANDARD
It was adopted by Great Britain in 1925.
Gold Bullion standard is a modified version of gold coin standard in
which there was no gold coinage and currency is convertible into
gold bullion (i.e. gold bars)
coins are not in circulation. The standard currency unit is
expressed in terms of a definite quantity of gold of a given fineness.
Gold does not act as a medium of exchange, but it remains a measure
of gold is not allowed, i.e. people cannot get their gold
converted into coins at the mint.
forms of money are not fully backed by gold reserves. But the
govt. guarantees full convertibility of currency into gold bullion.
• The govt. is always ready to buy and sell gold at fixed prices.
• There are no restriction on import and export of gold.
• Since govt. is always ready to convert token and paper money
gold at fixed price, it inspires public confidence.
• The standard is easy to understand and economical in functioning.
• As the gold coins are not in circulation, there is no wastage of the
precious metal. And there is no 100% backing of note issue.
• Since the currency is not fully convertible, the monetary authority can
expand adequate money supply by a small increase in gold reserves.
• Gold bullion standard operates automatically. If demand for money
falls people will start buying gold from the govt. As a result, gold
reserves, thus the money supply, will fall. In this way equilibrium in the
demand and supply of money will be established.
standard fails to work at the times of economic crisis. It looses
public confidence during war periods when the demand for gold
increases and the govt. reserves are not sufficient to meet this
is a managed currency system, as the govt. manages token
money, paper money and gold reserves. Without govt.
intervention, this standard cannot function properly.
this system, enough gold reserves are kept. They remain idle
and cannot be put to productive uses.
• Compared to gold coin standard, this standard inspires less public
confidence because gold coins are not in circulation. The currency is
generally converted into gold for foreign exchange purpose and not
for domestic purpose.
GOLD EXCHANGE STANDARD
It refers to a system in which there is neither a gold currency in
circulation not gold reserve held for external purposes. The domestic
currency of a country is not converted into gold for meeting internal
needs, but is converted into the currency of some foreign countries. The
external value of the domestic currency unit is determined in terms of
the foreign currency.
The domestic currency has no direct link with gold. It is linked at a fixed
exchange rate with the currency of another country which is convertible
In addition to gold reserves, the monetary authority of the country
maintains sufficient amount of foreign exchange reserves for making
The domestic currency is made of token coins and paper money.
There is no direct link between the volume of domestic currency and the
Foreign exchange and foreign bills along with gold constitutes the reserve
base of the country.
There is no free import and export of gold. It is regulated and controlled by
The domestic currency is not convertible into gold but is convertible at the
fixed rate into the currency of the other country based on the gold standard.
• Foreign payments are made either in gold or in currency based on gold.
• Gold is used neither as a medium of exchange nor as a measure of value.
But prices of all goods and services are indirectly determined by the price of
the domestic currency is not backed by gold reserves, the
monetary authority can easily expand money supply to meet the
increasing needs of trade and industry.
• It avoids the wastage of gold because of non-circulation of gold coins.
• All the advantages of the gold standard become available under this
standard without putting gold coins in circulation.
govt. of the country earns interest on the reserves kept in the
standard is particularly suited to the less developed countries
with gold scarcity.
The standard is complex in its working and is not easily understandable by the
As the domestic currency is not directly linked with gold and the currency is not
convertible into gold, it does not inspire much public confidence.
This standard does not work automatically and needs active govt. intervention.
It is called a managed standard.
Money supply can be increased easily but it is very difficult to reduce money
supply. Hence leads to inflation.
This system is not economical. To make it work, the govt. has to keep many
reserves which involve lot of expenditure.
As the domestic currency of the country is linked with the foreign currency, the
insecurity and instability of the foreign currency makes the monetary system of
the related country insecure and unstable.
GOLD RESERVE STANDARD
The monetary system adopted by Great Britain, USA, France in 1936 and
later Holland, Belgium and Switzerland under this agreement is called
Free flow of gold or foreign currency was allowed to stabilize exchange
rates and promote foreign trade without affecting the internal value of the
No link with gold
Restrictions on import-export of gold
Establishment of exchange equalization fund by participating countries to
maintain stability in exchange rates. For this purpose, the fund comprises
local currency, foreign exchange and gold. If the demand for a foreign
currency rises, the fund will increase the supply of that foreign currency in
the open market and thus will prevent any rise in the value of that currency
in terms of other currencies.
The composition and movement of reserves of the Exchange Equalization
Fund are kept strictly confidential from the public.
Exchange rate stability is achieved without disturbing the internal economy
of the member country
GOLD PARITY STANDARD
• The Gold Parity Standard is one of the form of Gold Standard.
• The Gold Parity Standard is the modern version of
International Gold Standard.
establishment of IMF in 1946.
member country of the International Monetary Fund
declare the value of its money unit in terms of a defined
quantity of gold.
standard aims at maintaining stable exchange rates
without interfering into the domestic monetary system of the
• The Par Value of Currency is defined in terms of Gold.
• Stability of internal price level is not necessitated
• It permits reasonable flexibility in exchange rates as alteration
in par value, under the regulation of IMF are allowed to the
• Local Currency has not linked with Gold: Under this system
gold is neither a medium of exchange nor a standard of value
gold doesn’t circulate in the country. Under this system local
currency consists of token coins made of cheaper metals and
• Definition of money in terms of Gold: Under this system it
is obligatory on the part of every member country of the
I.M.F. to define the par value of the money in terms of gold.
Member country follows on independent
monetary policy: Every member country of the IMF enjoys
complete freedom in its internal monetary affairs. The
monetary policy of a country has neither any direct nor any
indirect relationship with the monetary policy of another
of loan by the IMF: Under this system the IMF
Extends loan in foreign currencies to the member countries
to help maintain stability in foreign exchange rates.
RULES OF GOLD STANDARD
General Principles for the successful working of the international gold
should involve a common agreement among nations as to the
objective for which it existed.
• It should bring stability of prices and guarantee stability of exchange.
• Individual central banks should avoid such actions which might
endanger stability of prices through their effects on the policy of other
Rules for the smooth working of Gold Standard:
Free and unrestricted export and import of gold between countries.
Gold value of the domestic currency was to be kept stable. It should not be overvalued
Gold standard countries should make efforts to avoid international indebtedness.
When external debt increase, the country should increase exports to pay back the
interest and principal.
There should be free movement of goods and services among the gold standard
countries. Under gold standard, differences in prices between countries are expressed
through excess of exports or imports of one country over the other and the excess of
exports or imports are adjusted through inflow or outflow of gold. Thus, restriction on
import or export of goods disturbs the automatic working of the gold standard.
Availability of sufficient gold reserves and their proper distribution among the
participating countries is essential for the successful working of the gold standard.
The country importing gold should expand credit within the country and the gold
exporting country should contract credit.
DOWNFALL OF THE GOLD STANDARD
Following are the main reasons for the decline of gold standard :
Violation of Rules of gold standard like free movement of gold between
countries, automatic expansion and contraction of currency and credit with
inflow and outflow of gold, etc.
The successful working of gold standard requires free and uninterrupted
trade of goods between countries. But during interwar period, most of the
countries under gold standard adopted restrictive policies regarding imports.
This resulted in the reduction in international trade and thus the breakdown
of the gold standard.
Economic co-operation among the participating countries is necessary for
the success of gold standard. After World War I, there was a complete
absence of such co-operation among the gold standard countries, which led
to the downfall of the gold standard.
Political instability among the European countries was responsible for the
failure of gold standard. Factors like rumors of war, revolutions, fear of
transfer of funds to other countries threatened the safe working of the gold
A necessary condition for the success of gold standard is the availability of
adequate gold stocks and their proper distribution among member countries.
But in the inter war period, countries like USA and France accumulated too
much of gold, while countries of Eastern Europe and Germany had very low
stock of gold. Shortage of gold reserve led to the abandonment of gold
Smooth working of gold standard requires that gold should be used for trade
purposes and not for the movement of capital. But during inter war
period, excessive international indebtedness led to the decline of gold
standard. Reasons for excessive movement of capital are: plenty of borrowing
by the underdeveloped countries from the advanced countries for investment
purpose, Germany forced to pay war reparation in gold, movement of large
amount of short term capital from one country to another in search of
The world wide depression of 1929 -33 (Great Depression) gave the final blow
to the gold standard. Falling prices and wide-spread unemployment were the
fundamental features of depression which forced the countries to impose high
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