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MONETARY STANDARD
It refers to the type of standard money used in an

economy. (The legal money in which the government of

the country itself discharges its obligations.)

It

refers to the overall set of laws and practices which

control the quality and quantity of money in a country.

Determines and regulates the exchange value of goods and services.

METALLIC STANDARD
Under metallic standard, the monetary unit is determined in terms of
some metal like gold, silver, etc. Standard coins are made out of metal.

Metallic standard may be of two types:

Monometallism
Bimetallism

MONOMETALLISM
~ Monetary unit is made up or convertible to only one
metal. Only one metal is used as standard money whose
market value is fixed in terms of a given quantity and
quality of the metal.
~ The two metals chiefly used as money are gold and silver.
~ Monometallism continued almost without interruption until in 1834.

MONOMETALLISM
Merits:
Simplicity: Since only one metal is used as a standard of value,
Monometallism is simple to operate and easy to understand.

Public Confidence: The standard money is made of a precious metal, it

inspires public confidence.

Promotes Foreign Trade: It facilitates and promotes foreign trade. Gold

or silver standard is easily acceptable as an international means of
payment.

Avoids Greshams Law: It avoids the operation of Gresham Law which

states that, when both good and bad money exist in the economy, bad
money tends to drive good money out of circulation.

Self operative: It makes the supply of money self operative. If there is

surplus money supply, the value of money will fall and the people will start
converting coins into metal. This will wipe out the surplus money, thus
creating a balance.

Demerits

Costly

Standard: It is a costly standard and all countries,

particularly poor countries cannot afford to adopt it.

Lacks

Elasticity: Money supply depends upon the metallic

reserves. Thus, the money supply cannot be changed in
accordance with the requirements of the economy.

Retards

Economic Growth: Economic growth requires

expansion of money supply to meet the increasing needs of the
economy. But, scarcity of metal may create scarcity of money
supply which, in turn, may hinder economic growth.

Lacks

Price Stability: Since the price of the metal cannot

remain perfectly stable, the value of money lacks stability.

SILVER STANDARD
The monetary unit is defined in terms of silver. The standard

coins are made of silver and are of a fixed weight and fitness
in terms of silver.

The silver standard remained in force in many countries for a

long period. India remained on silver standard from 1835 to

1893. during this period, Rupee was the standard coin and its
weight was fixed at 180 grains and fitness11/12.

The coinage of the Rupee was free and people can get their
silver converted into coins at the mint. Similarly, coins could
be melted into bullion.

Silver standard lacks universal recognition as compared to Gold

standard. There is greater instability of both internal and
external values of money because silver price fluctuates more
than that of gold. Thus, as far as the metal is concerned, gold is
preferred to silver in most of the countries.

GOLD STANDARD
Gold Standard is the most popular form of
monometallic standard.

It refers to a monetary system in which the value

of monetary unit or standard currency of the

country is directly formed or linked with gold.

The gold standard remained widely accepted in

most of the countries of the world during the last

quarter of the 19th century and the first quarter of
the 20th century.

Gradually,

gold standard disappeared from

different countries and finally it was completely
abandoned by the world by 1936.

FEATURES OF GOLD STANDARD

Definition of standard money in terms of gold.
Gold coins are unlimited legal tender.
No restriction on import-export of gold.
Free and unlimited coinage of gold.
Free and unlimited melting of gold.
All other types of money (paper money) are
convertible into gold or equivalent of gold.

freely

TYPES OF GOLD STANDARD

Gold Coin standard

Gold bullion standard
Gold exchange standard
Gold reserve standard
Gold parity standard

GOLD COIN STANDARD

The gold coin or currency standard or the gold

specie standard is the oldest form of gold standard.
It is regarded as the traditional form of gold
standard. This standard was prevalent in U.K,
France, Germany and U.S.A before the World War I.
It was a pure form of gold standard, as full-bodied
standard coins made of gold were circulated under
this system. Token coins and other forms of money

FEATURES OF GOLD COIN STANDARD

Monetary unit is defined in terms of gold.
Coinage is unlimited and free of cost.
Other forms of money are also in circulation

and are

convertible into gold.

Free and unlimited melting of gold coins.

Free import and export of gold.
Gold is unlimited legal tender for all types

of payments. All

values are expressed in terms of gold.

Govt.

buys and sells gold at fixed prices and thereby

maintains parity between the face value and intrinsic value of
the standard coin.

MERITS
universally acceptable.
Free and unrestricted import-export
ensures stability in foreign exchange rates
This promotes international trade.
It is automatic working and needs no govt. intervention.
This is the simplest form of gold standard which can be
easily understood by the common people.

DEMERITS
It is fair-weather standard. It operates smoothly during peace
time but fails to work properly and to inspire public
confidence at the time of economic crisis.

There

is a great problem of wastage of gold. Circulation

of gold coins suffer depreciation.

GOLD BULLION STANDARD

It was adopted by Great Britain in 1925.
Gold Bullion standard is a modified version of gold
coin standard in which there was no gold coinage and
currency is convertible into gold bullion
(example: gold bars)

FEATURES GOLD BULLION

circulation. The standard currency unit
Gold coins are not inSTANDARD
is expressed in terms of a definite quantity of gold of a given
fineness. Gold does not act as a medium of exchange, but it
remains a measure of value.

Coinage

of gold is not allowed, i.e. people cannot get their

gold converted into coins at the mint.

Other

forms of money are not fully backed by gold reserves.

But the govt. guarantees full convertibility of currency into
gold bullion.

The govt. is always ready to buy and sell gold at fixed prices.
There are no restriction on import and export of gold.
Since govt. is always ready to convert token and paper
money into gold at fixed price, it inspires public confidence.

MERITS
The

standard is easy to understand and economical in

functioning.

As the gold coins are not in circulation, there is no wastage of

the precious metal. And there is no 100% backing of note

issue.

Since

the currency is not fully convertible, the monetary

authority can expand adequate money supply by a small
increase in gold reserves.

Gold

bullion standard operates automatically. If demand for

money falls people will start buying gold from the govt. As a
result, gold reserves, thus the money supply, will fall. In this
way equilibrium in the demand and supply of money will be
established.

DEMERITS
This standard fails to work at the times of
economic crisis.

Without govt. intervention, this standard cannot function

properly.

Under this system, enough gold reserves are kept.

Compared to gold coin standard, this standard inspires
less public confidence because gold coins are not in
circulation.

GOLD EXCHANGE STANDARD

It refers to a system in which the domestic

currency of a country is not converted into

gold for meeting internal needs, but is
converted into the currency of some
foreign countries. The external value of the
domestic currency unit is determined in
terms of the foreign currency.

The

domestic currency has no direct link

with gold. It is linked at a fixed exchange
rate with the currency of another country
which is convertible into gold.

FEATURES GOLD EXCHANGE

STANDARD

The domestic currency is made of token coins and paper money.

The domestic currency is not convertible into gold but is
convertible at the fixed rate into the currency of the other
country based on the gold standard.

There is no direct link between the volume of domestic currency

and the gold reserves.

Foreign exchange and foreign bills along with gold constitutes

the reserve base of the country.

Foreign payments are made either in gold or in currency based

on gold.

Gold is used neither as a medium of exchange nor as a measure

of value. But prices of all goods and services are indirectly

determined by the price of gold.

MERITS

As the domestic currency is not backed by gold reserves, the

monetary authority can easily expand money supply to meet

the increasing needs of trade and industry.

It avoids the wastage of gold because of non-circulation of gold coins.

All

the advantages of the gold standard become available

under this standard without putting gold coins in circulation.

The

govt. of the country earns interest on the reserves kept

in the foreign country.

This

standard is particularly suited to the less developed

countries with gold scarcity.

DEMERITS
complex in its working and is not easily understandable by the common
it does not inspire much public confidence. (since the domestic currency is
people.
not directly linked with gold and the currency is not convertible into gold )

This standard does not work automatically and needs active govt.
It is called a managed standard.
Money supply can be increased easily but it is very difficult to
reduce money supply. Hence leads to inflation.

This

system is not economical. To make it work, the govt. has to

keep many reserves which involve lot of expenditure.

As the domestic currency of the country is linked with the foreign

currency, the insecurity and instability of the foreign currency makes

the monetary system of the related country insecure and unstable.

GOLD RESERVE STANDARD

Free

flow of gold or foreign currency was allowed to

stabilize exchange rates and
promote foreign trade
without affecting the internal value of the domestic
currency.

FEATURES GOLD RESERVE STANDARD

No link with gold
Restrictions on import-export of gold
Establishment of exchange equalization

fund by
participating countries to maintain stability in exchange
rates.

If the demand for a foreign currency rises, the fund will

increase the supply of that foreign currency in the open

market and thus will prevent any rise in the value of that
currency in terms of other currencies.

The composition and movement of reserves of the

Exchange Equalization Fund are kept strictly confidential

from the public.

Exchange rate stability is achieved without disturbing the

GOLD PARITY STANDARD

The Gold Parity Standard is one of the form of Gold
Standard.

The Gold Parity Standard is the modern version of

International Gold Standard.
establishment of IMF in 1946.

It

is

the

outcome

of

Every member country of the International Monetary

Fund declare the value of its money unit in terms of a
defined quantity of gold.

The standard aims at maintaining stable exchange rates

without interfering into the domestic monetary system of

the member countries.

FEATURES GOLD PARITY STANDARD

Stability

of internal price level is not necessitated by

this standard.

It

permits reasonable flexibility in exchange rates as

alteration in par value, under the regulation of IMF are
allowed to the member countries.

Note:
PAR VALUE = The facevalueof a bond
IMF = International Monetary Fund

BIMETALLISM
Bimetallism

is a monetary system which attempts to base

the currency on two metals.

According to

Chandler, A bimetallic or double standard is

one in which the monetary unit and all types of nations
money are kept at constant value in terms of gold and also
in terms of silver.

Two

metallic standards operate simultaneously. Two types

of standard coins from two different metals are minted.
Both the types of standard coins become unlimited legal
tender.

FEATURES OF BIMETALLISM
The standard is based on two metals, it is the simultaneous
maintenance of both gold and silver standards.

There is free and unlimited coinage of both metals.

The mint ratio of the values of gold and silver at the mint is
fixed by the government.

The face value and the intrinsic value of both the coins are
equal.

There is free import and export of both the metals.

Both the coins are unlimited legal tenders. They are also
convertible into each other.

MERITS

Convenient full-bodied currency: It provides convenient full-bodied

coins for both large and small transactions. It provides portable gold
money for large transactions and convenient silver money for smaller
payments.

Price Stability: Under this system the shortage of one metal can be
offset by increasing the output of the other metal. Consequently,
stability in the prices of both the metals and hence, in the internal
prices can be ensured.

Exchange rate stability: As long as gold and silver are stabilized in

terms of each other, the currencies of all countries with fixed values in
gold or in silver would exchange for each other at nearly constant rates.

Sufficient money supply: Sufficient money supply is assured to meet

the trade requirements of the economy. Since there is no question of
both metals becoming scarce simultaneously, money supply is more
elastic under this system.

 Maintenance of bank reserves: Under this system, both gold

and silver coins are standard coins and unlimited tender. Therefore,
it is easy for the banks to keep their cash reserves either in gold
coins or in silver coins or in both.

Low interest rates: Under this standard, money is made of two

metals, its supply is generally more than its demand. As a result,
the interest rates decline. Banks can extend loans at cheaper rates.
This would increase investment and hence production in the
economy.

Stimulates foreign trade: It stimulates international trade in two

ways. (a) A country on bimetallism can have trade relations with
both gold standard and silver standard countries. (b) There are no
restrictions on import and export due to the free inflow of both
types of coins.

DEMERITS
Operations of Greshams Law: which states that, when both
good and bad money exist in the economy, bad money tends to
drive good money out of circulation.

Inequality between mint and market rates: Bimetallism can

operate successfully only if the equality between the market rate
and the mint rate can be maintained. But, in practice, it is difficult
to maintain equality between the two rates, particularly when one
metal is oversupplied than the other.

Payment difficulties: Bimetallism leads to difficult situation in

the settlement of transactions when one party insists on payment
in terms of particular type of coins.

Costly monetary standard: Bimetallism is a costly monetary

standard and all nations, particularly the poor nations, cannot
afford to adopt it.

PAPER CURRENCY STANDARD

refers

to a monetary standard in which inconvertible paper

money circulates as unlimited legal tender.

The

standard money is made of paper, both currency and coins

serve as standard money for purpose of payment.

No

gold reserves are required either to back domestic paper

currency or to facilitate foreign payments.

The

standard is known as managed standard because the

quantity of money in circulation is controlled and managed by
the monetary authority with a view to maintain stability in
prices and incomes within the country.

MERITS OF PAPER STANDARD

cheaper than gold or silver standard.

highly useful in monetary system because it
possesses great elasticity. The monetary authority
can easily adjust the money supply in accordance
with the requirements of the economy.

ensures price stability in the country.

enables a country to meet national emergencies
like war and other natural calamities in a better
and more effective manner than any other metallic

DEMERITS OF PAPER STANDARD

danger of inflation is almost in-built in it (Hence it
is easier to increase the supply of paper
money without keeping additional metallic
reserves.)

Instability in International Prices (Since the intrinsic

value of paper currency is zero)

does not work automatically. To make it work, the

government has to intervene from time to time.