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Gold Exchange Standard Features and Meaning

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Gold Exchange Standard

Gold Exchange Standard was a system between the year 1898-1913 where a number of eastern countries which were poor and did not posses enough gold.

Understanding Gold Exchange Standard

Under this standard, currency was convertible not into gold coin or gold bullion, but into the currency of some other countries which was on the gold standard.

It was marked with the following features:

  1. Gold coins were not widely available within the country.
  2. The currency was of paper note while token coins were of silver and other metals.
  3. These currencies could not be changed into gold coins or bullion.
  4. The local currency was linked with some foreign currency which was on gold currency standard and such currencies could be changed even at a fixed rate. E.g. the Indian rupee coins were convertible into Britain sterling at the ratio of 1$-4d per rupee.
  5. Countries which upheld the gold exchange standard maintained a two-tier foreign reserve. Part of the reserve was in foreign exchange and part of it in gold at foreign centers. Redemption of a currency in gold was made through the issue of a gold draft equal to the value of currency and equivalent to a definite weight of gold to be paid out at the foreign centre where the gold exchange standard country’s gold reserves were kept.

The gold exchange standard eliminated the storage, packing, handling and the shipping costs of gold bullion from the gold standard country to the gold exchange standard country.

The gold exchange standard facilitated gold pyramiding in the sense that the centre country which held the actual gold regarded it as gold reserve for its currency while the satellite or dependent countries holding claims as gold reserves too.

Gold Reverse Standard

In 1931 England abandoned the gold standard, while the U.S.A and France joined in 1933 and 1936 respectively. This led to instability in their exchange rates to maintain exchange stability.

They entered into tripartite monetary agreement in September 1936 and were joined by Switzerland, Belgium and Netherlands in the same year.

Even till the year 1939, this accord worked successfully and was referred to as the Gold Reserve Standard.

Under this accord, each country maintained an exchange equalization fund kept gold, local currency and foreign exchange.

The exchange rate was stabilized by purchase and sale of foreign exchange or gold from the fund.

There was no free export or import of gold except by the fund authority for maintaining stability in the exchange rate. Such gold was meant to be kept in the fund.

Gold Parity

In 1944 when the international monetary fund was established this system emerged.

Unlike the various features mentioned before or explained before in this system every country had to declare the par value of its monetary unit in terms of a fixed quality of gold.

It aimed at keeping the exchange rate of the currency stable in terms of gold.

The gold standard summarily had the following merit:

  • Automatic operation where the rules o the same were observed.
  • Inspired public confidence
  • No outside interference
  • Stable internal price
  • Check on inflation
  • Expansion of international trade
  • Stable exchange rate

But it had the following demerits as briefly stated below:

  • Exchange stability at the cost of Economic stability
  • Anarchy in world credit control
  • Fair weather standard
  • Deflationary Bias
  • No independent policy
  • Costly standard
  • Rigid standard etc.

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