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Tuesday, May 24, 2011

Gold Standard

Gold standard is a commitment by participating countries to fix the price of their currencies in terms of a specified amount of gold.Under gold standard, National and other domestic institutions ‘money could be freely converted into gold at the fixed price.
Suppose, India adapts to gold standard, then Indian government shall set Rs. 10,00,000 for 500 grams of gold, which means Rs. 2000 shall be worth 1 gram of gold.
So whenever there shall be overflow of money supply people could exchange  their money with  gold thus curtailing the inflation.
When the combination of gold and silver is used as the standard ,it is called bimetallism.
The greatest advantage of the gold system is it does not let  inflation to increase easily and prevents government from printing money but on other side it leaves very little scope  for government to use monetary policies efficiently.
Both UK and USA had gold standard some time back, but almost every country now-a-days uses fiat money based system.
The gold standard collapsed during World War I, due to inadequate supply of gold for reserve during the war time.Scarcity of gold for reserve purposes was taken care by gold exchange standard.

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