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Tuesday, May 24, 2011

Gold Exchange Standard

The biggest drawback of Gold Standard was done away by gold exchange standard.
Under gold-exchange standard, a nation’s currency is converted into bills of exchange drawn on another nation whose currency is easily convertible into gold at relatively stable rate of exchange.
Thus a nation with gold –exchange standard keeps its currency at parity with Gold with no need of keeping physical gold reserves, and such currencies are called reserve currencies.
Dollar (USD), Pound (GBP) and Euro are major reserve currencies.
But gold exchange standard too is not foolproof, if reserve currencies undergo devaluation then corpus of investing nations too keeps on eroding.

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