reasons for decline of gold standard

1. INTERNATIONAL FINANCIAL
MANAGEMENT
REASONS FOR DECLINE OF GOLD STANDARD
BY
V S SARMA ,PROF, MBA
VIDYA JYOTHI INSTITUTE OF TECHNOLOGY
1

2. INTERNATIONAL FINANCIAL MANAGEMENT
DECLINE OF GOLD STANDARD
 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 world war I in 1914,
gold standard was abandoned every7 where
mainly on account of two reasons:
a) to avoid adverse balance of payments and
 b) to prevent gold export falling in to the hands of
the enemy
2

3. INTERNATIONAL FINANCIAL MANAGEMENT
DECLINE OF GOLD STANDARD
 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 lead to the breakdown of the gold
standard which disappeared completely from
the world by 1937.
 The gold standard failed because the rules of
the system were not observed.
3

4. INTERNATIONAL FINANCIAL MANAGEMENT
DECLINE OF GOLD STANDARD
The following were the main reasons of the decline of
the gold standard :
 1) Violation of rules of Gold standard
 2) Restrictions on free trade
 3) Failure to maintain both exchange stability as well as
internal price stability.
 4) Unbalanced distribution of gold
 5) External indebtedness 4

5. INTERNATIONAL FINANCIAL MANAGEMENT
DECLINE OF GOLD STANDARD
6) Withdrawal of gold reserves by small
countries from London and New York
 7) Absence of International monetary centre
 8) Lack of cooperation
 9) Political in stability
 10) Great Depression (1929-33)
5

6. INTERNATIONAL FINANCIAL MANAGEMENT
DECLINE OF GOLD STANDARD
1) Violation of Rules of gold standard:
 The successful working of the gold standard
requires the observance of the three basic rules
of the gold standard:
 Fixing parity value of their currencies in terms of gold
content and to commit to the same
 Free movement of gold cross boarder
 Two way convertibility of their currency
 During war period countries did not show
commitment to the above rules thinking that
following gold standard leads to inflationary and
deflationary tendencies
6

7. INTERNATIONAL FINANCIAL MANAGEMENT
DECLINE OF GOLD STANDARD
2) Restrictions on free trade
 The success of gold standard requires free
movement /trade of gold but during war period
most of the countries abandoned the free trade
policy under the impact of narrow nationalism.
3) Failure to maintain both exchange stability as
well as internal price stability.
 This was impossible because exchange stability
is generally accompanied by internal price
fluctuations.
7

8. INTERNATIONAL FINANCIAL MANAGEMENT
DECLINE OF GOLD STANDARD
4) Unbalanced distribution of gold
 Success of gold standard depends upon the
availability of adequate gold stocks and their
proper distribution among the member nations.
 But USA and France accumulated too much of
gold while countries like Eastern Europe and
Germany had very low stocks of gold. This lead
to abandonment of the gold standard .
8

9. INTERNATIONAL FINANCIAL MANAGEMENT
DECLINE OF GOLD STANDARD
5) External indebtedness
 For smooth running of the gold standard, gold
should be used only for trade purposes and not
for movement of capital.
 But during war period due to excessive
international indebtedness there occurred
excessive capital movement on account of
three reasons:
 a) Victor nations forced Germany to pay war
reparation (war compensation) in gold
 b) Large movement of short term capital movement
in search of security (called refugee capital)
 c) Heavy borrowing by underdeveloped countries
from developed countries 9

10. INTERNATIONAL FINANCIAL MANAGEMENT
DECLINE OF GOLD STANDARD
6) Withdrawal of gold reserves from London and
New York by small countries
 Many small countries under gold standard kept
reserves in London and New York to avoid
transportation cost of gold
 Due to rumors of war, all these small countries with
drew their gold reserves.
 This led to abandonment of gold standard
10

11. INTERNATIONAL FINANCIAL MANAGEMENT
DECLINE OF GOLD STANDARD
7) Absence of international Monetary centre
 Movement of gold involves cost
 Before war (1914-18) there was no need to move
gold as London was working as international
monetary centre and small countries are having
deposits with London. Hence only book adjustments
needed
 But during world war London lost its position as
international monetary centre.
 In the absence of such centre, each country has to
maintain huge reserves of gold and large
movements of gold necessitated
 This was not easily manageable. Hence failed
11

12. INTERNATIONAL FINANCIAL MANAGEMENT
DECLINE OF GOLD STANDARD
8) Lack of cooperation among participating
countries
 Economic cooperation among participating countries
is the backbone of gold standard.
 But during World war I , there was complete
absence of economic cooperation among
participating countries
12

13. INTERNATIONAL FINANCIAL MANAGEMENT
DECLINE OF GOLD STANDARD
9) Political instability
 Political instability among European countries
also responsible the fall of gold standard.
 There were rumors of war, fear of transfer of
funds to other countries, revolutions
 All these factors threatened the safe working of
gold standard.
13

14. INTERNATIONAL FINANCIAL MANAGEMENT
DECLINE OF GOLD STANDARD
10)Great Depression (1929-33)
 The world wide great depression gave a final
blow to the gold standard
 Falling prices, unemployment were the
fundamental features of the great depression
 The above factors forced the countries to
impose high tariffs to restrict imports and thus
international trade
14