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International Gold Standard

Term Paper Contents:

  1. Term Paper on the Two Aspects of Gold Standard—Domestic and International
  2. Term Paper on the Rules of Gold Standard Game
  3. Term Paper on the Characteristics of International Gold Standard
  4. Term Paper on the Functions of International Gold Standard
  5. Term Paper on the Causes of Downfall of Gold Standard
  6. Term Paper on the Merits of International Gold Standard
  7. Term Paper on the Demerits of International Gold Standard
  8. Term Paper on International Gold Standard or Foreign Exchange Standard
  9. Term Paper on Gold Standard: Present and Future Position

Term Paper # 1. The Two Aspects of Gold Standard—Domestic and International:

ADVERTISEMENTS:

On the basis of functions and objectives five forms of Gold Standard can be divided into two part:

i. Domestic and

ii. International.

The objective of Gold Standard was to maintain the public faith and maintain the stability in the value of currency, while the objective of International Gold Standard was to maintain the foreign exchange.

ADVERTISEMENTS:

In Gold Currency Standard, Gold Bullion Standard and Gold Exchange Standard money were directly or indirectly convertible into gold. So, the above three Gold Standard were exist in domestic and international Gold Standards. In Gold Reserve Standard and Gold Parity Standard Currency were not convertible into gold. So these were used only in the international currency standard.

Term Paper # 2. Rules of the Gold Standard Game:

Gold Standard can be continued in special circumstances only. Prof. Keynes named these circumstances as ‘Rule of the Gold Standard Game.’

These rules were as follows:

ADVERTISEMENTS:

1. Independent Trade:

It is essential for the ‘Gold Standard’ that there should not be strict restrictions on the means of international trade. However, a totally free trade is not a Pre-condition for the gold standard. There emerges disturbance in the way of gold standard if there are obstacles before the free trade.

2. There should be Free Import and Export of Gold:

Free mobility of gold from one country to the other, is essential for the proper management of gold standard. If a country retains all the gold and does not allow its export to take place, there will be accumulation of gold in that country and there will be situation of scarcity of gold in other countries. Some countries will be compelled to quit ‘Gold Standard’ due to fall in the gold reserves.

3. Contraction and Expansion of Credit According to the Amount of Gold:

The government of the country adopting gold standard should follow the rule that when gold comes in the country there should be expansion of credit and currency and there should be contraction of currency in case of gold going out.

4. Flexible Prices:

In the countries with gold standard there should be enough flexibility in the price structures so that there can be increase or reduction in the price levels as per needs due to the effects of gold movements.

5. Maintaining Gold Equity:

ADVERTISEMENTS:

In the countries with ‘Gold Standard’ the monetary authorities should maintain ‘Gold Equity Value’ by the sale and purchase of gold in unlimited amount at a fixed rate. At the same time, the gold price of the domestic currency should neither be devalued, not overvalued.

6. Lack of Capital Mobility:

Due to mobility of capital, there emerges disturbance in the automaticity of gold standard. So it should be stopped. Self-adjustment in gold standard is possible only when there is equality in the investment prices in all the countries.

Term Paper # 3. Characteristics of International Gold Standard:

ADVERTISEMENTS:

Following were the features of the International Gold Standard:

(i) It was not essential to keep gold currency in circulation in this system but the value of the prime currency was fixed in gold.

(ii) Import and export of gold was free. The government provided gold at the certain rate for the foreign payment.

(iii) Due to the dependence of the currency of the country on gold, the amount of currency had to be increased in the case of import of gold and decreased in the case of export of gold.

ADVERTISEMENTS:

(iv) There was no fear of inflation in this system but the amount of currency as compared to the needs in the countries adopting ‘Gold Standard’.

(v) Gold Standard was generally automatic, but it was managed by the central bank.

(vi) People retained faith in currency under gold standard because there was not much fluctuation in the internal and external value of currency.

Term Paper # 4. Functions of International Gold Standard:

The analyses of the main functions of the International Gold Standard are as follows:

1. Convenience in International Payments:

ADVERTISEMENTS:

The most important function of the International Gold Standard was that it made international trade very easy because the payment for the import and export could be made without any difficulty. The countries having gold standard could make their transactions very easily.

2. Fixation and Stability in Exchange Rates:

It was very easy work to determine the rates of their currencies for the countries adopting ‘Gold Standard’. The values of their currencies were fixed in gold. The exchange rates of the currencies were fixed in the equivalent amount of gold and there were not fluctuations in these.

3. International Stability:

It was essential for the countries adopting ‘Gold Standard’ to keep a gold reserve for currency. So, it was not possible to have inflation because more gold had to be kept in the reserve for issuing more currencies. So, there was not more fluctuations in the value of currencies of the countries adopting ‘Gold Standard and there also remained sufficient Stability in the Prices of Gold.’

Difficulty in the Performance of the above Mentioned Functions:

ADVERTISEMENTS:

However, all the three functions (fulfilling the foreign payments, fixing the exchange rates of currencies and maintaining the internal values of currency) were very important but it was not easy to perform these functions. In the general circumstances, there was not much difficulty in performing these functions but it was almost impossible to maintain the amount of gold reserves during the economic or political crisis.

So, there took place fluctuations in the exchange rates of currency and changes took place in the prices of goods. The downfall of the ‘Gold Standard’ during the world war and depression is an evidence of it.

Term Paper # 5. Causes of the Downfall of Gold Standard:

Gold Standard work satisfactorily before 1914 because there were favourable circumstances for it in the world, but after the world war I, there took place some abnormal changes in the economies of some countries which handicapped the currency system of many countries and the free import and export of gold was restricted.

So, gold standard was abandoned during 1914-18. Many countries made plans to re-establish ‘Gold Standard’ after World War I and decided to adopt ‘Gold Exchange Standard’ in place of ‘Gold Currency Standard’. Accordingly, the USA and England adopted it in 1924 and 1925 respectively. Many other countries of Europe also adopted ‘Gold Standard’ in new ways. The last country to adopt it was France (1928).

However, fruitful and tireless efforts were made to adopt ‘Gold Standard’; it could not be implemented successfully. Consequently it ended in 1931 when Britain abandoned it. Actually, countries did not have such situations after the world war and worldwide economic depression that they could follow the rules of Gold Standard.

ADVERTISEMENTS:

Following were the main causes of the collapse of ‘Gold Standard’:

Main Causes of Downfall:

1. Neglect of Rules:

Almost all the countries violated the rules of Gold Standard for the implementation of Gold Standard established after 1918. The USA and other countries violated the rule of free import-export by imposing taxes on the import of goods.

Different countries imposed restrictions on the import and export of gold and as a result gold remained accumulated in a few countries only. Different countries did not try to bring their price level equivalent to international prices. This disturbed the trade balance of many countries and gold standard had to be abandoned due to fall in the gold reserves.

2. Withdrawal of Short-Term Capital:

ADVERTISEMENTS:

Many countries had deposited the reserves of their capital with foreign banks due to political instability. A lot of such capital was deposited in Britain. This capital was withdrawn during crisis.

After World War I, France withdrew its gold reserve from England in a very short time as a result of which England had to abandon ‘Gold Standard’ in 1931. Similarly, such short term capital was withdrawn from Australia and Germany too and ‘Gold Standard’ came to an end automatically.

3. Payment of International Debts:

Many countries had to take loans from the USA while, adopting Gold Standard and maintaining it. Payment of its capital and interest had to be done regularly. Besides this, Germany and some other countries were paying the war compensations to the USA, England, France and other Allies.

Consequently, the gold reserves got accumulating with the USA (which already had plenty of gold reserves) and the amount of gold get on decreasing with other countries. Ultimately it became so low that these countries had to end the changeability of their currency into gold.

4. Effects of the International Depression:

The worldwide depression very badly hit ‘Gold Standard’. This crisis started from the USA and gradually grasped Germany and England too. The USA also experienced the effects of the depression because the countries abandoning ‘Gold Standard’ had stopped importing goods from the USA which created a situation of over production and unemployment and it had to quit gold standard.

5. Lack of Flexibility in Economies after World War:

There did not remain flexibility in the economies of many countries after World War I. There were many causes for it-many countries were burdened with heavy debts for which long-term payment agreements had to be done. This created high pressure of expenditure workers strongly opposed. Changes in the Prices of goods were not according to ‘Gold Standard’. As a result there could not be a balance and gold standard collapsed.

6. Emergence of Nationalistic Feeling:

Before World War I, all the countries of the world imported goods from one another, but after the war the feeling of maintaining a trade balance got momentum and most of the countries started attempting to fulfill their needs themselves only. It effects was that there went on increasing inequality in international prices. Consequently, it became essential to end gold standard.

7. Political Disturbance:

In all the important countries of the world, there emerged much instability in Production and trade due to increase of struggle between workers and owners and Party-Politics. This instability disturbed the monetary system as well and different countries had to abandon gold standard.

8. Un-Equal Distribution of Gold:

The distribution of gold became unequal in different countries due to wartime circumstances. Gold was imported in the USA in return for the sale of goods. After the war, France, the USA and some other countries had also adopted the tendency of depositing gold as a result of which there became unequal distribution of gold in different countries. Due to this inequality, there get much reduction in the gold reserves with many countries and they did not want to let it reduce any more. So, they felt it proper to abandon gold standard.

9. Unnaturality of Exchange Rates:

The exchange rates determined by England after the war very high. Lord keynes had suggested to keep the new exchange rates of pound at 4.3 dollar, but this rate was kept 4.866 which was higher than the market rates. On the other hand, France reduced the rate of its Frank by 80 percent. The unnatural rates of these two countries caused much harm to the stability of gold standard.

10. Political and Economic Crisis:

It is very essential to keep the monetary and economic system under exchange discipline, otherwise it can’t be successful. In the condition of political and economic crisis, it becomes difficult to maintain this discipline. It was natural for the gold standard to collapse for being ‘a fair-weather friend.’

Thus after the world war I there appeared such circumstances that gold standard ended completely in 1936.

Term Paper # 6. Merits of International Gold Standard:

Following merits of International gold standard are worth-mentioning:

1. Stability in the Value of Money:

The value of money in the countries adopting gold standard often remains stable. Self-will can’t be the basis of issuing currency as gold is the basis of money. If there is a fall in the value of money for a temporary rise in the amount of money it is possible only due to rise in the gold reserve. There is an increased export due to rise in the Prices of goods and the excess of geld is automatically exported.

As a result, the prices of goods come at the international level and the value of money comes at the natural level. For the economic development of a country, Stability in the Prices of goods and value of money is very essential. So this merit of gold standard is very helpful in natural and regular development.

2. Stability in Exchange Rates:

There comes stability in the prices and the mutual exchange rates of different currencies remain stable as the import and export of goods and services remain free under gold standard. Stability in gold standard is very essential for the international trade because the country purchasing goods has the faith that there will not be the pressure of extra payment.

If there takes place much change in the exchange rates of currency it becomes difficult to determine the amount of payment and it hinders trade. Thus, gold standard maintains the normality of exchange rates. As a result there is an increase in trade and it helps in bringing proper changes in the exchange rates.

3. International Payments:

Under gold standard (as gold is the basis of every currency) there is no difficulty for any country to take payment in any currency. Due to this merit of gold standard every country can make international payment in its own currency.

This maintains the mutual relationship of different currencies and there are not Auctions in their values in short-terms. Again under gold standard a major difficulty i.e. the determination of the exchange rates is solved very easily. Thus gold standard performs the task of a ‘passport’ and grants the currencies of all the countries the status of international citizens.

4. Automatic:

Gold standard has the merit of automaticity and the central bank or the government does not have to make any special interference, it has just to be cased that the rules of gold standard are followed properly. When there is unfavourable balance of trade for a country and gold is exported it has to reduce the amount of currency and as a result the price levels in that country comes down and the demand for goods increases.

Consequently, there is a rise in export and the balance of trade becomes favourable, the import of gold begins and the price levels of goods come to normal levels. The central bank has to take normal steps, but it should be remembered that this system can work properly only when all the countries completely follow, the basic rules of gold standard.

5. Stability in the Price of Gold:

Under ‘Gold Standard’ gold is the basis of currency. So it is essential to maintain stability in its price. The price of gold depends on the international demand and supply of gold, but every country is ready to sell and purchase gold at the fixed price. So, there is not much Auctions in the price of gold.

Thus, under gold standard there is stability in the price levels of currency, foreign exchange and exchange rates. International payments take place easily and the central bank has to do only normal interference in the monetary system.

Term Paper # 7. Demerits of International Gold Standard:

The demerits of International Gold Standard are as follows:

1. A Fair-Weather Friend:

Gold Standard is adopted so that the faith of people in paper currency should be maintained any they can get gold in return for currency but whenever there comes a time of real change, this system has to be abandoned. In last century, gold standard has been tested twice (1914-18 and 1930-34) and it failed very badly on both these occasions. Actually, gold standard can continue only during the conditions of peace and normality.

The conditions of peace and normality, the conditions of pressure on production, development and international trade in any economy can be faced only upto a certain limit. After this, the monetary system has to be adjusted accordingly. So, it becomes impossible to maintain the gold standard system under the situation of intense pressure.

2. Difficulties in Economic Accommodation:

According to the rules of gold standard there is much pressure on the economy due to the accommodation of the economic conditions. Actually, it can’t be considered to be automatic because the central banks of the countries adopting it have to control it. These banks contract and expand credit according to the rule which possess a number of difficulties and affects the economy of the country adversely.

3. Not Possibility of Price Stability:

There are two important objectives of the monetary policy maintaining stability in internal prices and maintaining stability in exchange rates. The history of gold standard has proved it that both these objectives can’t be attained at the same time. The rule of gold standard compels the country to maintain the stability in exchange rates by compromising with price stability. So, exchange stability is achieved in gold standard by sacrificing economic stability and employment.

4. Improper for the Developing Countries:

Gold Standard is not suitable for those countries which want to expand their economy which means these countries which are making efforts for the planned economic development.

5. Independent Policy not Possible:

As all the countries adopting gold standard are connected with one another none of them follow an independent policy i.e. it cannot adopt any such monetary policy which is more favourable for its domestic economic conditions.

6. Fear of Deflation:

In gold standard there is export of gold from a country, it must make a proportional reduction in the amount of currency (as currency is used on the basis of gold reserves) but the gold-reserve can be determined in the lowest percent. By keeping a bigger reserve of gold, less amount of currency can be kept in use.

7. Expensive:

Gold Standard is completely improper in modern developing economy because a volt amount of invaluable metal like gold lay useless. By using gold for purchasing cheap goods from other countries, economic development can be encouraged.

Gold lying uselessly does not perform any productive work. Keeping, a huge gold deposit only for a Psychological Satisfaction that the people’s faith in the currency should be retained is not only misuse of resources but an injustice with gold itself and the economic system of the country.

Term Paper # 8. International Gold Standard or Foreign Exchange Standard:

The quotas of all countries were fixed by the International Monetary Fund and every country’s 25 Percent gold of its quota was deposited with the International Monetary Fund. Actually, an International Gold Exchange Standard or Foreign Exchange Standard was set-up with the establishment of International Monetary Fund.

The main features of the new ‘Gold Standard’ were as follows:

(i) The values of currencies of all the member countries were fixed in gold by the International Monetary Fund.

(ii) The second necessity of gold standard is normally that for the changeability of currencies (at national on foreign level) there is a need of gold reserves. A central reserve of gold was made by the contribution of all the countries in the IMF.

(iii) It was a feature of old gold standard that the countries adopting it maintained a free export-import and the import and export of gold was free for payment. If, t here appeared a problem of payment before a country, the exporter country often provided credit for short-term to the needy country. This helped in running the gold standard without any disturbance. In the new gold standard all these problems were solved by the IMF.

(iv) International Gold Exchange Standard set by the efforts of the IMF, made it possible to make all foreign payments in every currency because the needed currency was supplied by the IMF. Thus movement on exchange was not essential.

SDR Standard:

The USA snapped the relation of dollar with gold in August 1971 and after which dollar was devaluated twice. Consequently, the gold standard setup by the IMF was also ended. In its place SDR (Special Drawing Right) was established.

In this system, the exchange rates of the currencies of all the countries was attempted to be determined in SDR. SDR is an independent unit (it is not any currency) which is based on the currencies of five major countries.

SDR has reduced the importance of dollar and other major currencies. SDR has not been used for international payments. So, SDR has not been able to occupy the place of dollar.

Term Paper # 9. Gold Standard: Present and Future Position:

Considering the fall of gold standard and popularity of paper currency it would just be an imagination to re-establish Gold Standard. Actually, it is not possible to achieve the necessary conditions and international co-operation needed for gold standard.

The IMF has indirectly setup gold exchange standard. After the World War II also, there remained the dominance of gold standard but according to the recommendations of the 20 Nations Committee setup in June, 1972 for the improvement in the International Monetary System.

The dominance of gold in the IMF was ended and SDR which was also called paper gold was accepted as the international reserve asset as a result of which the authorised value of gold was ended. 1/6th of the total gold of the IMF was decided to be auctioned and 1/6th was decided to be given back to the member nations.

Thus, at present the position of gold in the monetary system of the world has been ended and SDR has been accepted as an authorised medium of international loans. So, the re-establishment of gold standard is only a day­dream.