Term Paper on the Gold Standard | Economics

Here is a term paper on the ‘Gold Standard’ for class 9, 10, 11 and 12. Find paragraphs, long and short term papers on the ‘Gold Standard’ especially written for school and college students.

Term Paper # 1. Definitions and Essentials of Gold Standard:

Forms of a bullion standard have always been very important. The first of them is gold standard and the other is silver standard.

There is a common concept about the gold standard that in this system it is essential that gold currency must continue in circulation, but it is not so in reality.

It will be clarified by following definitions:

1. According to Robertson, “Gold Standard is a situation under which a country maintains the same value of a unit of its currency and a definite quantity of gold.”

2. According to Hawtrey, “Under gold standard the value of gold is fixed in currency and in this way a relation between gold and currency is established.”

3. According to Coulborn, “Gold Standard is a system under which a unit of the main currency of the country is inter-convertible with a definite quantity of a certain variety of gold.”

4. According to Crowther, “When a currency is convertible to gold by any law, such a currency system is called gold standard.”

After the study of above definitions it is clear that following are the fundamental elements of gold standard:

(i) It is not essential in gold standard that gold currencies must continue in circulation.

(ii) There should be some relation of the currency of the country with gold standard.

(iii) The currency of the country should be convertible into gold.

(iv) People have the right to sell and purchase gold beyond a certain limit.

(v) There is no restriction of the government on the import and export of gold.

Term Paper # 2. Evolution of Gold Standard:

We get the descriptions of the circulation of gold currencies in the ancient civilisations of India, Rome, Greek and Egypt but gold was mainly used by traders. The common people used silver coins for the daily payments. The fall in the price of silver after 1870 compelled many countries to adopt gold standard.

Consequently, Germany abandoned bimetallism and adopted Gold Standard. Later Sweden, Norway, Denmark, France, Belgium, Switzerland, Italy, Greece, Netherland, the USA and Japan adopted gold standard. Thus gold standard had been established in almost all the prominent countries.

The period from 1900 to 1914 is called the ‘Gold Age’ of the gold standard. Gold standard continued in the world without any obstacle during this period. Its main reason was that there remained ‘Political Peace’ in the world and there took place much progress in commerce trade and industries.

As a result, countries adopting ‘Gold Standard’ did not put any restriction on the import and export of gold; neither did they try to create a gold reserve in on improper way. The rules of gold standard were often followed honestly. So gold standard continued successfully.

Term Paper # 3. Forms of Gold Standard:

The forms of gold standard change with time and circumstances.

In the modern age, following are the main forms of gold standard:

(I) Gold Currency Standard,

(II) Gold Bullion Standard,

(III) Gold Exchange Standard,

(IV) Gold Reserve Standard, and

(V) Gold Parity Standard.

I. Gold Currency Standard:

Gold Currency Standard is the oldest form of gold standard. It is also called as gold coin standard, traditional gold standard, orthodox gold standard and full gold standard.

Characteristics of Gold Currency Standard:

Following are the main characteristics of this system:

1. The gold coins remain in circulation and amount of gold is fixed by law.

2. Gold currency is full-bodied coins, which means its face value; market value and internal value are almost equal. Its coinage is independent and it is unlimited legal tender money.

3. To support the main currency of the country subsidiary currencies of cheap and light metals are also in circulation.

4. Paper currency is also in circulation for the sake of convenience of payment. This paper currency is convertible to gold. Cent percent gold is kept in reserve for convertibility of this currency.

5. There is no restriction on the import and export of gold for foreign payment and other transactions.

6. Gold is the basis of entire currency system under the gold standard. There is no restriction over melting, purchasing, selling or the free business in gold. This way, gold becomes the base of entire transactions.

7. Purchasing and selling of gold is done at the rate fixed by the government or the authorised monetary organisation.

Merits of Gold Currency Standard:

Following are the merits of gold standard:

1. Equality and Stability in the Value of Gold:

The value of gold remains similar in the Countries adopting gold standard because there is import of gold from other countries in the country where the gold becomes dearer and as a result there is an increase in the reserves of gold and the value comes to the normal rate.

Similarly, when the value of gold in a country falls, there is export of gold from that country to the other countries and as a result there is decrease in the supply of gold and the price increases to the normal rate. In this way, the value of gold remains the same in all these countries and there is no big fluctuation in the value.

2. Stability in the Internal Prices of Goods:

The internal prices of goods in the countries adopting gold standard maintain stability as the basis of currency is gold and there is stability in the prices of gold. So, if there is stability in the value of gold, it is natural to have stability in the value of currency. There is no change in the prices of goods as there is stability in the value of currency. There is no fear of inflation and deflation.

3. Public Confidence:

Due to stability in the prices of gold and goods the faith of people in the currency system of the country maintains and there does not arise any crisis in the system of transactions in the country. Another reason for maintenance of this faith is that there is a sufficient amount of gold in currency and it has its own value. Besides this, people have faith in the currency system of the country as all the currency and token coins are convertible into gold.

4. Simplicity:

Gold coins are in practice in the gold currency standard and paper currency can be converted into gold coins. So, this system is not difficult or complex because every individual knows that gold currency has equal use in the country and abroad.

5. Convenience in the Determination of Exchange Rates:

It becomes easy to determine the exchange rates of currencies and these rates can generally remain at the same rate because there is no fluctuation in the exchange rates without changes in the price of gold.

6. Automatic:

Under gold standard the rate of currency and the price of gold maintain their normal level in an automatic way. If the price of gold increases in a country, there starts import of gold and the price lowers due to increased supply. Similarly, if there is decrease in the price of gold in a country, there starts export of gold from that country.

This result in the reduced supply of gold and exchange rates of currency comes to its normal level. This work gets completed without any government interference. This is called automaticity of gold standard. For this automaticity of gold standard only cannon has called it ‘Fool-Proof and Knave-Proof’.

Demerit of Gold Standard:

Following are the demerits of gold standard:

1. Costly and Inelastic Standard:

Gold Standard is a costly and inelastic system which cannot be adopted by developing and poor countries.

There are three evident causes for this:

(i) There is much need of gold for currencies under gold standard.

(ii) A lot of gold is wasted due to depreciation in gold due to use of gold currency.

(iii) If the economy of a country is developing and there is need of much currency, it gets difficult to supply it.

So gold standard is very costly and it is rather unsuitable for undeveloped or developing countries. That is why almost all the countries of the world (except the U.S.A.) abandoned gold currency during the World War I itself and never adopted it again.

2. Deflationary:

Under the gold standard system, it is not possible to mint coins without gold reserves. It is not possible to adopt this system in the case of in availability of sufficient quantity of gold. In modern age, there is no vast reserve of gold to most of the countries. So, it is natural to have scarcity of currency in the scarcity of gold reserves. So, gold standard is dis-inflation.

3. Not Supporting during Crisis:

Gold currency standard is a ‘Fair-weather Friend’. Whenever there is economic or political chaos in the society, people and government start collecting gold and the convertibility of currency into gold has to be stopped. With this view gold currency form is only a fair weather friend.

4. Price Stability Imaginary:

Gold currency standard is considered superior because it ensures stability in the prices of goods. But according to critics, the stability of prices in the gold standard is imaginary because there is i change in the price level with the change in the price of gold.

There are many factors responsible for the change in the price of gold e.g. the discovery of new gold mines, improvements in the methods of gold excavation, change in the production cost of gold or change in the import-export of gold. Consequently, the internal price-level of gold does not remain stable.

5. Automaticity is a Myth:

Automaticity in gold standard continues only so long as it gets international co-operation. As it could not get the international co-operation after the World War I, the automaticity of gold standard met with its end. However, some countries tried to maintain it ignoring the laws of gold standard but adopting this standard became extremely difficult due to ending of its fundamental quality of automaticity.

6. Superfluous:

Gold standard has been considered essential for maintaining the exchange rate of currency and stability in the prices of goods but in an actual way the stability of prices depend on the economic policy of the government. If there is stability and efficiency in the government system and a proper development policy is followed, no crisis arises in the economy. So, it is not justify following a costly system like gold standard for bringing stability in prices and exchange rates.

Some economists have bitterly criticised the gold standard due to its above demerits. For example, Prof. Robertson has called it. The satisfied of the tastes of the build people’ and Prof. Hawtrey has described it as ‘The creater of law­lessness in the credit world.’

The biggest demerit of the gold standard is that it needs a great deal of gold for minting gold coins and keeping reserves behind currency. Due to its costliness only it becomes difficult to maintain this system. Its example was seen during the period of the World War I (1914-18). During this period, the gold currency standard failed to maintain the stability in the situation of this crises. So, this system had to abandon.

II. Gold Bullion Standard:

Evolution and use of Gold Bullion Standard:

Gold currency standard was in use in most of the countries of the world before the World War I, but it was not possible to maintain it during and after the war. So, a new system was adopted in which it was not essential to keep gold coins in use.

Under this system paper currency and symbolic currency remained in use and the value of currency was fixed in gold. The government provided the convenience of selling and purchasing gold at that rate. This way the price of currency got fixed in gold and people could get gold from the government for any work at a certain rate.

Characteristics of Gold Bullion Standard:

Following are the features of gold bullion standard:

1. Gold coins are not in circulation paper currency and coins of light metals remain in circulation but the value of these currency notes and coins are defined in gold.

2. As gold coins are not in circulation, their minting is not independent.

3. Only a proportional gold reserve is maintained behind paper currency, not a hundred percent reserve is required.

4. The value of gold is fixed by the government and the paper currency of the country is convertible to gold at a certain rate only.

5. The government assures sale and purchase of unlimited amount of gold for any work at a certain rate.

Merits of Gold Bullion Standard:

Following are the merits of this system:

1. Economy:

Gold coins are not in circulation. So, there is no need of minting coins and this expenditure is avoided. There is also freedom from the loss by depreciation by the use of gold coins.

2. Profitable Utilisation:

In gold currency standard, maximum gold is used in the form of coins and in this way a costly thing of the country remains scattered among people. Consequently, its beneficial use can’t be done but under gold bullion standard, entire gold remains reserve with the government and it can be used for the national development.

3. Simplicity:

Gold bullion standard is an easy system in which people have simply to be made to understand that the paper currency they hold can be converted to gold at a certain rate.

4. Public Confidence:

Gold coins are not in circulation in the gold bullion standard but the government is ready to convert paper currency and token coins into gold on the demand of people. So, it wins public confidence.

5. Automatic and Elastic:

In gold bullion standard automaticity exists because the amount of currency increases or decreases according to the needs. When there is more currency with people, they start buying gold with their currency. As a result, the reserve of gold with government reduces and the amount of currency in the market gets decreased.

On the contrary if there is a bigger demand of currency in the market, people give gold to the government to obtain currency. As the gold reserves with the government increases, it brings out more currency in circulation. This way, in the gold bullion standard, the amount of currency increases or decreases according to the needs.

6. Stability in Exchange Rates:

In gold bullion standard there is gold reserves behind currency, so there cannot be much expansion in the amount of currency. Consequently, there is no apprehension of the fall of the exchange rate of currency.

Demerits of Gold Bullion Standard:

Following are the main demerits of gold bullion standard:

1. Idle Reserves:

The gold reserves which are kept stay idle. That gold’s are not utilised. So, this system is not so economical.

2. Automaticity is a Myth:

It is not proper to declare this system as an automatic system because the government does not often like to sell gold and reduce its reserves in the case of increase in the Price of Gold (or increase in the supply of currency). Therefore, the amount of currency goes on increasing and there is always a fear of fall in the exchange rate. So, the government has to stay aware continuously to maintain the exchange rate.

3. Not Changeable:

Gold bullion standard also collapse like gold currency standard in the time of crisis because in this system also there remains a dean of gold reserves. The actual situation is that this system continues till people do not demand gold. Just as the demand of gold begins, the government stops payment in gold after some times because gold reserves, which remain shorter already, begin declining rapidly.

4. Low Public Confidence:

In gold bullion standard, neither the gold currency continues in circulation, nor is there sufficient gold for the convertibility of the existing currency. So, there is little public confidence in this system.

The Standard Enjoys all the Merits but Suffers no Demerits of Gold Currency Standard:

In fact, gold bullion standard is called the improved version of gold currency standard because:

1. There is no need of gold currency as in gold currency standard. There is also no fear of loss due to depreciation.

2. As far as the issue of confidence in currency is concerned, people can sell and purchase gold from the government at a certain price for any work and this maintains the faith of the people in the currency. In general circumstances, people do not care so much whether, gold will be obtained in return for currency or not.

3. In gold bullion standard there remains stability in the internal Prices of gold for the maintaining of gold reserves and as a result there is no fear of inflation.

4. The internal price of gold remains equal to the international prices as there remains no restrictions on the import and export of gold. So, gold bullion standard has all merits of gold currency standard. At the same time it does not have the demerits of gold currency standard such as dearness and depreciation of gold.

III. Gold Exchange Standard:

Why Gold Exchange Standard Evolved? Both Gold Currency Standard and Gold Bullion Standard are expensive systems because both of these need a lot of gold for currency system. The main cause of the special need of gold is that the government is compelled to give gold for both domestic uses-and foreign payments.

To solve this difficulty, such a standard was found out in which the government determines the price of gold in currency and also maintains gold reserves but gold is not given to people for domestic uses. For the foreign payments, the government either manages gold or arranges the needed foreign currency. To manage this system gold or foreign currency reserves are kept in foreign countries.

Characteristics of Gold Exchange Standard:

Following are the characteristics of gold exchange standard:

1. Gold coins are not in circulation under gold exchange standard. Paper currency and token coins are in circulation.

2. Under this system, the price of currency of the country is determined in gold or foreign exchange currency of a country in which gold currency standard or gold bullion standard is used. But there is no system of giving gold in exchange of currency.

3. Under this system, reserves of gold or foreign currency is kept in foreign and it is used for foreign payment when needed.

4. Arrangement of gold or foreign exchange is made for foreign payment. Merits of Gold Exchange Standard

Following are the merits of gold exchange standard:

1. Economical:

Gold exchange standard needs very little gold reserves to maintain because gold is given only for foreign payment. So, this system is suitable for developing countries.

2. Elastic:

There is no difficulty in bringing sufficient amount of currency in circulation in this system because there remains no need of keeping gold reserves for paper currency. So, gold exchange standard is elastic.

3. Exchange Stability:

The exchange rate is associated with a strong currency in this system. So, there is not much chance of fluctuations in it.

4. The Facility of Foreign Payment:

Reserves of gold or foreign exchanges are kept in this system. So, it makes the foreign payment convenient.

5. Investment Abroad:

Interest is earned on the gold currency deposited in foreign countries only which do not have much scope of capital investment.

Demerits of Gold Exchange Standard:

The main demerits of gold exchange standard are as follows:

1. Loss Due to Keeping Reserves in Foreign:

Under this system, a country has to keep gold in any foreign bank for the convenience of foreign payments. If the bank fails on any account, the country has to face a lot of loss. The maximum income of foreign exchange earned in this system has to be deposited in foreign countries and a very little interest is earned on it. This creates a continuous scarcity of capital in the country.

2. Lack of Elasticity:

However it gets easy to expand currency in this system as there remains no need to keep a gold reserve, but there is much difficulty in deflation.

3. Dependence of the Currency of a Country on Foreign Currency:

Under this system the currency of the country has to be associated with a foreign currency, the value of the dependent currency also changes. The value of Indian Rupee changed according to the British Pound Sterling during the British Period for the same reason.

4. Dis-Trust:

Due to in-availability of gold for domestic use, there is always a fear of distrust of people in this currency.

5. Inflation:

There is always a fear of inflation due to lack of sufficient gold reserves for currency.

6. Dearth of Automaticity:

Gold exchange standard is not automatic because it needs the interference of government to run it.

IV. Gold Reserve Standard:

There has developed a difficulty of maintaining a stable rate of foreign exchange after all the countries abandoned gold standard. To solve this difficulty, exchange equalisation fund was established by England in 1932 to maintain stability in foreign exchange by sell and purchase of foreign currencies.

Later, similar funds were setup by the USA and France too. After the setting up of exchange equalisation fund in these three countries, an agreement was signed among these three countries in 1936 and it was called “Tripartite Monetary Agreement.” According to this agreement, the value of gold could not be changed unilaterally without consulting one another and the import-export of gold could be done on the government level only.

After some times, Belgium, Netherlands and Switzerland also involved in this agreement. The currency system adopted by the countries on the basis of this agreement is known as Gold Reserve Standard. This system lasted for a very short time and ended just after the beginning of the World War II.

Characteristics of Gold Reserve Standard:

Following were the characteristics or features of gold reserve standard:

1. The exchange rates of the currencies of the USA, France, Great Britain, Netherlands, Belgium and Switzerland were fixed under this system. These rates could be changed through mutual agreement only. The Price of gold was also fixed and this fixed price could be changed with agreement of all three countries only.

2. The total gold treasury of the country remained under the control of central government and its import and export could be according to the government policy only, not on the individual level.

3. Under the gold reserve standard, gold remained in use were not convertible into gold. This way gold was neither a medium of exchange nor a measure of value.

4. To maintain the stability in the exchange rates of different countries, Exchange Equalisation Fund or Exchange Stabilisation Fund were established.

In these funds, reserves of foreign currencies were kept and when there was an increase in the demand of any currency, it was supplied from these funds. This way, stability was maintained in the exchange rates of the currencies of these countries. If there was an intense increase in the demand of any currency, there was a system of meeting its supply with gold.

It means that the needed currency was obtained from the concerned country and gold was given in return. This way, the transaction of gold between different countries continued and the country obtaining gold issued its currency keeping that gold in its treasury or reserves. For this arrangement, it was named Gold Reserve Standard.

5. People were not given the information regarding the amount of gold kept as reserve under ‘Gold Standard Reserve’. The data of import and export of gold was also kept secret. Just with the beginning of the World War II, the agreement related to gold came to an end the gold reserve standard also met with its end.

V. Gold Parity Standard:

In the modern time, it is very difficult to adopt any such monetary system that should be directly dependent on, gold or in which there should be the system of giving gold in return for currency because there is extreme scarcity of gold with most of the countries of the world. Considering this point of view, a new international monetary system had been established by the International Monetary Fund. It was named Gold Parity Standard. Some economists also call it gold exchange standard.

Under Gold Parity Standard all members of the International Monetary Fund kept some gold reserves with the IMF determined by it. Besides it, all the currencies were associated with dollar which means the value of the currency of every country was determined in dollar.

At the same time, the gold value of every currency was also declared. Thus, along with determining the mutual parity of the currencies of member countries their prices in gold were also determined. If there was a possibility of increase or decrease in the price of the currency of a country, an arrangement was made to maintain it at determined level by the International Monetary Fund.

Characteristics of Gold Parity Standard:

Following are the main characteristics of Gold Parity Standard:

1. The gold reserve was kept in this system, but this reserve was centered with the International Monetary Fund. There was no need of keeping individual reserves to manage the currency system of different countries property.

2. The gold value of the currencies of member countries of the International Monetary Fund was determined by it and the exchange rates of these currencies were determined in dollar too. Before making any change in the rates determined by the IMF, it became essential to take its approval.

3. Gold is neither the medium of exchange in any country, not it is a measure of value of paper currency and token coins of cheap metals are in use in the country which are not convertible into gold.

4. The International Monetary Fund made arrangements for the short- term loans for the member countries to stabilise the values of their currencies and during this period, the country could improve its economic system and repay its loans. If a country wanted to make a permanent change to its exchange rate, it could be done after the permission of the IMF. Gold Parity Standard was more practical and elastic in this view.

5. Gold Parity Standard was also international like gold exchange standard because the monetary policy of every member country was influenced by the other and the interests of one-another was considered well while making any change into it. So far as the issue of internal monetary policy is concerned, they had a normal freedom in it. But it is worth mentioning in this matter that when there is fluctuation in the internal value of any currency, its effect on the foreign exchange rate can’t be avoided.

Term Paper # 4. The Dollar Crisis and the Breakdown of Gold Parity Standard:

Before August 1971, the value of the currencies of the member countries were fixed in gold and dollar, and these values could be changed by the consent of IMF. In August 1971, the US President ended the convertibility of dollar into gold and as a result the structure of equity rates which was prepared after the effort of many years, collapsed and broke down.

Dollar was devaluated twice and the exchange rates of the powerful countries were left open; with the freedom of fluctuations. The unit of calculation by the IMF was changed from dollar to SDR (Special Drawing Rights) and the value of one unit of SDR was declared equal in 16 currencies of the world in July 1974.

In this way under the system of IMF, SDR standard was established in July 1974 in which the value of one unit of every currency was determined in SDR. The Present value of one unit of SDR is fixed in the currencies of five major countries. So, there is always a fluctuation in it. Thus, the standard with stability value in the world was ended.