Tuesday, 22 November 2011

Define monetary standard and monetary system

Monetary standard is the unit of account by which we measure the value of all kinds goods and services. The monetary standard or standard money can be gold, silver or paper. If the unit of account is gold we will say that it is a gold standard.

Monetary system includes in its scope the designation of the unit of account plus the whole Govt. Mechanism established to regulate the creation of money and to control its quality in circulation. The monetary system is designed in every country according the domestic and international requirements.

A commodity standard is that monetary unit which has its standard value equal to the value of a designated quantity of a particular commodity or of a group of commodities. The commodity standard can be established in gold or silver or in both.

According to Kent, "A monetary system in which the value or purchasing power of the monetary unit is not kept equal to the value of a specified quantity particular commodity or of a group of a commodities".
It has three distinguished features.
i. It has little or no value within itself as a commodity.

ii. It is not redeemable in any commodity in quantity substantially equal value to its own stated value.

iii. Its purchasing power per unit is not maintained at par with that of any other commodity unit. Fiat money is usually a paper money or credit money.

When the value of monetary unit is fixed and maintained in terms of one standard metal only, it is called monometallism. If the standard of money unit is gold the country is said to have a gold standard. If the unit of money is silver then it will be called silver standard.

Under silver standard the monetary unit is given fixed quantity of silver and all other forms of money are maintained at par by making it convertible into silver at the fixed rate. Silver is allowed to move freely inside and outside the country.


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