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1. THE 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
 (c) The governments in different countries
should help facilitate the gold movements by
keeping their internal price system flexible in
their respective economies.
(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. ADVANTAGES
 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.
Easy system to
introduce and
operate

5. 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.

6. 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.
 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.

7. REASON OF 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

8. THANK YOU
By :- ANAT SHAH
CLASS :- XII COMMERCE