A commitment by participating countries to fix the prices of their domestic currencies in terms of a specified amount of gold National money

and other forms of money were freely converted into gold at the fixed price

WHAT IS A GOLD STANDARD?

A gold standard is a monetary system where gold is used to measure the value of goods, services or investments in an economy. Printed money is used as legal tender where it has an equivalent value of gold upon demand. This system ensures that issued notes by a government are backed by the intrinsic value of gold. This gold standard was introduced in 1816 by Great Britain to ensure ease of trade by using bank notes that represents a particular weight of gold. It soon became universal for countries to use the gold standard in their monetary system. Under the gold standard, prices of goods and services slowly deflated as the industrial revolution gave way for more efficient tools and thus boosting output.

The main features of Gold Standards

Establish a Central Bank with exclusive authority to issue notes in their jurisdiction. The gold reserves in the country under custody of the Central Bank. Each Central Bank to provide an unconditional guarantee to buy and sell unlimited quantity of gold at official price. Each currency note to contain an irrevocable promise from the issuing authority to redeem the note on demand against specified quantity of gold. Total value of currency note in circulation to be restricted to the extent of gold reserve.

Mint Par of Exchange

Example:
If, And, Then, 1 oz Gold = USD 400 in USA 1 oz Gold = GBP 250 in UK 250 GBP = USD 400

Therefore, 1 GBP = USD 400/ 250 = USD 1.6000 Hence, GBP/USD 1.6000 Exchange Rates calculated in this manner were called Central Exchange Rate.

Types Of Gold Standard

Gold Specie Standard
Gold Bullion Standard Gold-Exchange Standards

Gold Specie Standard

The gold specie standard is a system which is associated with circulating gold coins.

This means that the face value of the coin should represent the value of precious metal content in the coin.

Gold Bullion Standard

Paper currency note under the Gold Standard were expected to conform to the Gold Bullion Standard.
This means each note was required to contain an irrevocable promise from the issuing monetary authority to redeem the note against specific quantity of gold.

Gold Exchange Standard

A gold exchange standard is a mixed system consisting of a cross between a reserve currency standard and a gold standard. In general it includes the following rules.
First, a reserve currency is chosen. All non-reserve countries agree to fix their exchange rates to the reserve at some announced rate. To maintain the fixity, these nonreserve countries will hold a stockpile of reserve currency assets.

Second, the reserve currency country agrees to fix its currency value to a weight in gold. Finally, the reserve country agrees to exchange gold for its own currency with other central banks within the system, upon demand.

Advantages
Easy system to implement & operate.
It provided for a very high level of exchange rate stability which promoted international trade & investment.

High levels of inflation are rare, and hyperinflation is nearly impossible as the money supply can only grow at the rate that the gold supply increases. It provides fixed international exchange rates between those countries that have adopted it, and thus reduces uncertainty in international trade.

How the Gold Standard Helps the Economy

Providing a self regulating and stabilizing effect on the economy
Export more goods they receive more gold, which means they can print more money and increase their profits It keeps countries out of debt and trade deficits

The Price Specie Adjustment Mechanism helped countries to achieve trade equilibrium.

Disadvantages
The system did not provide for any revision in the official gold price.
There was no flexibility in the system to create money supply at times of economic stress such as war, natural disasters etc. this resulted in repeated breakdowns in the system. The responsibility of maintaining the system was on deficit countries. This resulted in adoption of neutralization of resources which made the system ineffective. The Price Specie Adjustment Mechanism was very slow in its effectiveness due to which countries with continuous deficit suffered recessions resulting in unemployment & other social problems.

The End of the Gold Standard

Outbreak of World War I Change of system from Gold Specie to Bullion Standard
United Kingdom ended the gold bullion standard because of large amounts of gold going overseas

Australia, New Zealand and Canada also ended the gold standard because of money problems that were associated with the Great Depression.
Gold Standard was suspended so they could print enough money to pay for their investment in the war In 1933, Roosevelt prohibited owning gold privately, except for jewellery Then the Breton Woods System came into effect in 1946

Forbes Predicts U.S. Gold Standard Within 5 Years of economic, fiscal, It will help the nation solve a variety
and monetary ills It will stabilize the value of the dollar, restore confidence among foreign investors in U.S. government bonds, and discourage reckless federal spending If the gold standard had been in place in recent years, the value of the U.S. dollar would not have weakened as it has and excessive federal spending would have been curbed

Continued .
The constantly changing value of the U.S. dollar leads to marketplace uncertainty and consequently spurs speculation in commodity investing as a hedge against inflation By restoring the gold standard, the United States would shift away from less responsible policies and toward a stronger dollar and a stronger America

 Although the last vestiges of the gold standard disappeared in 1971, its appeal is still strong. Those who oppose giving discretionary powers to the central bank are attracted by the simplicity of its basic rule. Others view it as an effective anchor for the world price level. Still others look back longingly to the fixity of exchange rates. Despite its appeal, however, many of the conditions that made the gold standard so successful vanished in 1914. In particular, the importance that governments attach to full employment means that they are unlikely to make maintaining the gold standard link and its corollary, long-run price stability, the primary goal of economic policy.

BY
AAYUSH JAIN (01) ASHISH SAINI (11) HITESHRI PATEL (21) SHATABDI DUTTA (51) VIKAS CHOUDHARY (61)