[PDF Notes] What are the main advantages of Gold Standard?

Various advantages of the gold standard are discussed as under:

1. Simplicity:

Gold standard is considered to be a very simple monetary standard. It avoids the com­plicacies of other standards and can be easily understood by the general public.

2. Public Confidence:

Gold standard promotes public confidence because (a) gold is universely desired because of its intrinsic value, (b) all kinds of no-gold money (paper money, token coins, etc.) are convertible into gold, and (c) total volume of currency in the country is directly related to the volume of gold and there is no danger of over-issue currency.

3. Automatic Working:

Under gold standard, the monetary system functions automatically and requires no interference of the government. Given the relationship between gold and quantity of money, changes in gold reserves automatically lead to corresponding changes in the supply of money.

Thus, the disequilibrium conditions of adverse or favourable balance of payment on the international level or of inflation or deflation on the domestic level are automatically corrected.

4. Price Stability:

Gold standard ensures internal price stability. Under this monetary system, gold forms the currency base and the prices of gold do not fluctuate much because of the stability in the monetary gold stock of the world and also because the annual production of gold is only a small fraction of world’s total existing stock of monetary gold.

Thus, the price system which is founded on relatively stable gold base will be more or less stable than under any other monetary standard.

5. Exchange Stability:

Gold standard ensures stability in the rate of exchange between countries. Stability of exchange rate is necessary for the development of international trade and the smooth flow of capital movements among countries. Fluctuations in the exchange rate adversely affect the foreign trade.

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