Class XI, Principles of Economics, "Gold Standards"

Gold Standards

Country is said to have gold standard when gold the standard of value or when gold is the basis of all currency. There are four types of gold standard.

Gold Currency Standard

This is the oldest type of gold standard and is called full gold standard. A country is said to be full gold standard when gold serves not only as a standard of value but also circulates as coins. Britain, U.S.A, France, Germany and other European countries had this type of gold standard before 1914.

Gold Bullion Standard

Under this system the value of the currency is fixed in terms of gold by making such currency convertible in to gold (bullion, not coins). Gold does not circulate as coins. The countries where this system prevailed gold may move freely into or outside the country. No gold coins circulated. The idea was to make it available only for foreign payments.

Gold Exchange Standard

It is the gold standard for making foreign payments only; inside the country the people use token coins and paper notes. For making foreign payments the external value of the home currency convertible in to gold and the currency authority of the home country is ever prepared to make available the foreign currency in exchange of home currency. When the home country’s nationals receive payment from abroad in the form of currencies convertible into gold the currency authority of the home country converts it into home currency.
Two reserves are kept to ensure the smooth working of this system. One reserve is kept in the form of home currency inside the country and another reserve is kept at a foreign center in gold. When the home country has to receive payments from abroad then gold or foreign currency convertible in to gold is paid in to the reserve kept at the foreign center and in exchange the international currency is issued from home reserve.
When payments have to be made abroad then the internal currency is paid to the currency authority with in the home country and is and is put in to the home reserve. The currency authority give in exchange gold out of the reserve kept at the foreign center.

One of the greatest defects of gold exchange standard is that it is too complicated. It is not automatic. It requires unnecessary duplication of reserves.

Gold Parity Standard

It is latest to enter the gold standard. It is the type, which prevails under the aegis of IMF. In this system the internal currency consist largely of notes and some form of metallic coins but not of gold, nor these notes are convertible in to gold coins, gold bullions a foreign currency based on gold. But the only respect that gold comes in to play under this system is that the currency authority takes upon itself, the obligation of maintaining the exchange rate of the domestic currency stable in terms of certain quantity of gold. This is the type of gold standard, which the member countries of the IMF are supposed to have.