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Wednesday, 23 November 2011

Define gold standard or Distinguish between the various forms of the gold standard also discuss their merits and demerits

GOLD STANDARD :-
When the unit of money is exclusively defined by law as a certain amount of gold, of specified weight and fineness and when all forms of money with in a monetary system are kept at markets is called gold standard.

DIFFERENT FORMS OF GOLD STANDARD :-
1. Full Gold or Gold Currency Standard :-
In this currency standard the units of currency are full bodied gold coins. A certain amount of gold of specified weight and fineness is declared by law.

2. Free Coinage :-
People are allowed to get the bullion converted in unlimited quantity into standard gold coins with or without charge. Gold can be melted by the people, there is no restriction.

3. Freedom Of Purchase And Sales :-
People are at liberty to purchase, sale, import or export the gold. There is no limitation.

4. Legal Tender :-
Gold is declared a legal tender money. People accept it on the basis of the metals utility.

5. Convertibility :-
Other forms of money can be converted at par in gold coins. So it provides security to other forms of money. People accept the other forms of money because its purchasing power is equal to the gold coins. Due to shortage of gold this system could not be maintained in first world war.


GOLD BULLION STANDARD :-
Gold bullion standard was introduced in 1925 in England. But structure of gold standard is now different than 1914. Its main characteristics are following :

1. Gold Coins Do Not Circulate :-
The actual currency consists of paper currency notes and other token coins, while gold coins do not circulate. But central bank is under obligation to convert them in to gold bullion.

2. Coinage Of Gold Is Not Free :-
The holder of gold is not entitled to get it converted in to gold coins.

3. Purchase/Sale Of Gold :-
Govt. purchases and sells the gold at a fixed price. The seller of gold is paid in other forms of money, which may be paper or bank money.

4. Gold Reserves :-
Gold reserves are held in the form of bullion bars by the central bank.

5. No Restriction On Use :-
There is no restriction on the use of gold bullion on the individuals. The people can even export the gold.
Govt. purchases and sells the gold at a fixed price. The seller of gold is paid in other forms of money, which may be paper or bank money.

4. Gold Reserves :-
Gold reserves are held in the form of bullion bars by the central bank.

5. No Restriction On Use :-
There is no restriction on the use of gold bullion on the individuals. The people can even export the gold.

ADVANTAGES OF GOLD BULLION STANDARD :-
This standard was adopted due to the following reasons, in Britain, France, U.S.A and India.

1. Economy In The Use Of Gold :-
It economizes the use of gold, because gold coins are not circulated in the country.

2. No Wear And Tear :-
When gold coins circulate then a lot of gold is wasted in wear and tear.

3. No Demand Of Gold :-
A gold is not demanded in exchange for notes. Gold can be held by central bank of the country.

4. Prestige Restored :-
When gold is kept in the hands of the Govt. it gives full support in the effective monetary management of the economy.

5. Automatic System :-
The expansion and contraction of currency is automatically maintained by the sale and purchase of gold. When Govt. purchases the gold, the currency in circulation contracts.


GOLD EXCHANGE STANDARD :-
Definition : The arrangement of purchase gold drafts which are convertible into gold abroad from the central bank is known as gold exchange standard. It is an advanced form of gold standard and its main requisites are following.

1. Gold Coins Do Not Circulate :-
In this standard gold coins do not circulate in the country.

2. Internal Currency Is Not Convertible :-
The internal currency may be paper notes but these are not convertible in to gold.

3. Case Of Gold Exchange Country :-
The currency of the gold exchange country is however freely convertible into the currency of gold standard country.

4. Reserves Are Kept In Other Forms Of Money :-
The reserves of gold exchange country are kept in the form of bank deposits, treasury bills and other liquid assets in those countries which are on gold.

5. Stable Exchange Rates :-
In this standard, exchange rate stability is secured and international payments are facilitated.

6. Economical :-
This system is very economical and lot of precious gold is saved.

DEMERITS :-
1. Complicated System :-
It is very difficult and complicated system and common man can not understand it.

2. Not Elastic :-
It is not an elastic system, specially the contraction of currency is very difficult affair.

3. Reserve Duplication :-
It creates unnecessary duplication of reserves sometimes the balances were kept in gold standard reserves, paper currency reserves, and Govt. balances.

4. Conversion Problem :-
There is also a danger of depository country to default on its promise to convert the currency into gold at a predetermined rate.

5. Deficit or Surplus Problem :-
If a country on gold exchange standard develops a cronic deficit or surplus it leads to speculative activities which are harmful for the economy in long run.

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