For the smooth and automatic working of gold standard, certain conditions are to be fulfilled. These conditions are called ‘the rules of the gold standard game’. According to Crowther. “The gold standard is a jealous God. It will work provided it is given exclusive devotion.”
1. Free Movements of Gold:
There should be no restriction on the movement of gold among the gold standard countries. They can freely import and export gold.
2. Elastic Money Supply:
The Government of the gold standard countries must expand currency and credit when gold is coming in and contract currency and credit when gold is going out.
This requires that whatever non-gold money (paper money or coins or demand deposits) may be in circulation, gold reserves in some fixed proportion must be kept.
For example, if the gold reserve ratio is 50%, then for a reduction of $ 1 gold reserve, there must be a reduction of $ 2 of credit money.
3. Flexible Price System:
Price-cost system of gold standard countries should be flexible so that when money supplies increases (or decreases) as a result of gold inflow (or gold outflow), the prices, wages, interest rates, etc., rise (or fall).
4. Free Movement of Goods:
There should also be free movement of goods and services among the gold standard countries.
Under gold standard, differences in prices between countries are expressed through excess of exports or imports of one country over the other and the excess of exports or imports are adjusted through inflow or outflow of gold. Thus, restrictions on import or export of goods disturb the automatic working of the gold standard.
5. No Speculative Capital Movements:
There should not be large movements of capital between countries. Small short-term capital movements are necessary to fill the gap in the international payments and, thereby, to correct the disequilibrium in the balance of payments.
For example, the monetary authority of a country, with adverse balance of payments, can raise interest rates, and thus, attract capital from other countries and, in turn, correct its adverse balance of payments position.
But large panic movements of capital as a result of political, social and economic disturbances are dangerous for the smooth working of the gold standard.
6. No International Indebtedness:
Gold standard countries should make efforts to avoid international indebtedness. When external debt increases, the country should increase exports to pay back the interest and the principal.
7. Proper Distribution of Gold:
An important requirement for the successful working of the gold standard is the availability of sufficient gold reserves and their propter distribution among the participating countries.