Reasons For Gold Standard To Get Abolished
Saturday, 28. November 2009
The Gold Standard was a monetary system in which the participating countries made a commitment to make gold their currency. It was the most famous monetary system in history, but is no longer in use.
The gold standard was first adopted by the United Kingdom. In the 1790s, there was a great shortage of silver in the UK, and so it started a major restructuring programme through which, gold coins were introduced. In’44, the Bank Charter Act was introduced according to which, the Bank of England notes, backed by gold, were made the legal standard in the country. The United States at that time was following a bi-metallic standard, which is the use of both gold, and silver.
However, the gold standard was embraced in’73, when gold was made the legal standard, and both major nations started using it. Other countries such as Germany, Italy, and France, also followed, and participated in this monetary system. The gold standard existed from’80 to’14, and resulted in main monetary development all over the world.
The gold standard was used to regulate the demand and supply of the currency of a country in the long term. It helped in keeping the money supply stable. It was also used for determining the exchange rate of currency between two countries.
All currencies moved together, and the gold standard led to a fixed exchange rate all over. All doubts in economy were removed, and even inflation could be controlled since governments could not float currency in the market to build pressure.
Although the gold standard seemed to be appealing, but due to certain effects of it, this system was ended. The biggest drawback of the gold standard being the domino effect of the economy of one country on another country, forced the price levels, money supply and economy to be varying all the time. Due to this, many times the world economy would become unbalanced.
Apart from this, to be a part of the monetary system, all participants were required to abide by certain regulations, which were not convenient for all countries. They were bound to change exchange rates as per the fixed rate, and most of them did not follow this. Even unemployment rate was at its peak, and all the countries, which produced gold, had huge demands on them.
Although the gold standard no longer exists, it still has its advocates. Many people still believe in it as it leads to price stability, prevents the central banks from having too much control over the monetary policy, and allows a simple system of fixed exchange rates. However, owing to its many disadvantages, a revival is unlikely.
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