Several Standards for Gold

The gold standard was evaluated by several countries to fix the prices of their local currencies in terms of a specified amount of gold. The gold standard was also an international standard to compare the value of one country’s currency with other countries’ currencies. Because complying with the standard helps in maintaining a standard price for gold, rates of exchange between currencies is attached to gold. For example, the U.S.A. fixed the price of gold at $26.67 per ounce, and Britain fixed the price at £6.17 per ounce. Therefore, the rate of exchange between dollars and pounds (par exchange rate) necessarily equals $4.867 per pound.

The standard fixed exchange rate of gold has helped immensely in maintaining the monetary and non-monetary transmission of turbulence from one country to the other country. So, because of that turbulence in one country, in terms of money, price level, income and expenditure also affect the other countries. These fixed exchange rates of the standard gold have maintained the equal price level all around the world. Because of which, the world has been forced to move together in terms of price levels. This maintenance of price levels among different countries has been achieved with the help of a process known as the price-specie-flow mechanism. This mechanism works as follows:-

Suppose that, due to any infrastructure or technological reasons any country receives a major boost in its economic growth. Then, because of the fact that the supply of gold money is fixed, the prices in that country will fall.

Because of the fact that we have a gold standard, we can see the stability in long-term price; otherwise, the countries with good economic growth would have taken the advantage over the underdeveloped countries. Due to this standard, we can see some sort of equality among countries all over the world in terms of gold standard.

Compare the mentioned average annual inflation rate of 1/10 % between 1880 and 1914 with the average of 4% between 1946 and 2003 (The reason for the absence of periods from 1914 to 1946 is that it was not a period of the gold standard). Prices were highly unstable in the short run because economies under the gold standard were vulnerable to real and monetary shocks. The short-term instability depends largely on the fluctuation of prices. We can measure the short-term price instability by calculating the ratio of the standard deviation.

Despite the fact that the last traces of the gold standard were lost in 1971, its universal appeal is still strong. Even those who oppose giving distinctive powers to the central bank are attracted by the simplicity of its basic rule. From 1914, though many conditions that were made for this standard were lost, one cannot deny the appeal of gold standard.

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