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Monetary standards refer to the system or framework that controls or facilitates the
movement of money.
Commodity Standard- This standard exists where the value of monetary units equal
the value of specific amounts of commodity (for example gold).
A metallic standard in more than one country implies a fixed exchange rate. For
example, if the international monetary system is a gold standard, each country
defines the price of its currency in gold or silver, which is called parity.
The metallic standard was suspended during wars. In these times, no metallic
standard existed for anchoring exchange rates.
Bimetallic standard
There are two basic monetary standards. Most are familiar with the second since it
remains predominate in developed economies.
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Aptly described, the term monetary standard means a particular type or kind of
standard money used in the monetary system of a country and to which other kinds
of money are related.
Commodity standard
The gold-exchange standard came into prominence after World War I because of an
inadequate supply of gold for reserve purposes. British sterling and the U.S. dollar
have been the most widely recognized reserve currencies. The requirement of a fixed
rate of exchange for the reserve currency has the effect of limiting the freedom of the
reserve-currency countrys monetary policy to solve domestic economic problems. The
use of gold reserves is now limited almost exclusively to the settlement of international
transactions, on rare occasions.
a. Gold need not be coined or held as bullion but the monetary unit of the country is
defined in a specific quantity of gold.
b. The national treasury or the central bank establishes a credit balance with
bankers in a foreign country that is operating on a gold-coin standard. This balance, it
may be stressed, may be built up by borrowing abroad or by depositing gold or credits
with the foreign bankers.
c. The government or central bank undertakes to buy and sell at an established price
unlimited quantities or drafts upon one or more banks located in one or more foreign
countries which operate on the gold-coin or gold-bullion standard.
d. All kinds of credit money are redeemable at par in gold drafts; and
e. There is a free gold market, that is, people are privileged to import and export gold,
to hoard it, and to buy it from mining companies.
A key economic influence and a major factor of international relations between the
U.S. and other countries, the dollar exchange standard once defined international
trade. It is still in use in some countries, though many are now off the standard.
The dollar exchange standard provides a fixed rate of exchange between the currencies
of participating countries and the U.S. dollar. Some 44 countries, primarily European
and Asian participated, including Japan and the UK.
With the abandonment of the gold standard by leading countries of the world
sometime in the early thirties, a new currency system because quite well- known. This
is so called Managed Currency System. The kind of currency system is perhaps as
common today as the gold standard prior to its abandonment in 1931. Evidently, this
standard came about as the answer for a frantic search for an ideal standard of value
in lieu of a metallic standard.
The argument offered in support of the alleged advantage obtained from the use
of inconvertible paper money over metallic money is that it can be effectively employed
to stabilize price by regulating its supply in accordance with changes in acceptable
index numbers. Control of the discount rate on the part of the central bank authorities
would cause it to be the chief tool of currency management. Thus its advocates
contend that such inconvertible paper money could perform the monetary functions
discharged by metallic currency without producing adverse effects on the nations
currency.
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Some theorists charge that a free monetary system would be unwise, because it
would not stabilize the price level. Money, they say, is supposed, to be a fixed
yardstick that never changes. Therefore, its value or purchasing power, should be
stabilized to debtors and creditors with sure contracts of paying back dollars, or gold
ounces, of the same purchasing power as they lent out.
Yet, if creditors and debtors want to hedge against future changes in purchasing power,
they can do so easily on the free market. When they make their contacts, they can
agree that repayment will be made in a sum of money adjusted by some agreed-upon
index number of changes in the value of money.
The stabilizers have long advocated measures, but strangely, they rarely availed
themselves of the opportunity. Must the government then force certain benefits on
people who have already freely rejected them? Apparently, businessmen would rather
take their chances, in this world of irremediable uncertainty on their ability to anticipate
the conditions of the market. After all, the price of money is no different from any
other free prices on the market.
Money, in short, is not a fixed yardstick. It is a commodity serving as a medium
for exchanges.
Flexibility in its value in response to customer demands is just as important and just as
beneficial as any other free pricing market
QUANTITY THEORY
In monetary economics, the Quantity Theory of Money (QTM) it states that money
supply has a direct, proportional relationship with the price level.
It is the idea that the supply of money in an economy determines the level of prices
and changes in the money supply result in proportional changes in prices.
In other words, the quantity theory of money states that a given percentage change in
the money supply results in an equivalent level of inflation of deflation.
QTM describes the relationship between inflation, the money supply, real output, and
prices. Its a theory that explains how much money is needed in order for an
economy to function.
TRANSACTION THEORY
The transactions demand for money is positively affected by the amount of real
income and expenditure, and is negatively affected by the rate of interest, which is
the opportunity cost of holding money for this or any other reason. It also depends
on the timing of expenditures and the length of the payment period.
The Baumol-Tobin model focuses on the optimal number of transactions per unit of
time for a household, which dictates the transactions balances held on average over
time.
INCOME THEORY
The prices of the commodities do not depend upon the quantity of money on
the contrary, the amount of circulating medium is a consequence of prices.
The value of money depends upon the demand for the money. But the demand for
the money arises not on account of transaction but on account of its being store
of value.
- Money moves at a fixed rate and serves only as a medium of exchange while in
the Cambridge approach money acts as a store of value and its movement
depends on the desirability of holding cash.