The gold standard is a system under which the legal tender money is either made of gold or is convertible into it at fixed rates. Under a gold standard, the value of money depends on and varies with the value of gold and the quantity of money depends on the quantity of gold available for monetary purposes. Thus, under gold standard there is a direct connection between money and gold.
Merits of the Gold Standard – several advantages are claim for the gold standard, especially when it is adopt by number of countries. At one time it was thought that the International Gold Standard was the best form of monetary system. The following arguments can be used in support of International Gold Standard :
• Under the gold standard the volume of money depends on the supply of gold. The currency system cannot be tampered with by government or currency authority. Deliberate inflation is not possible under gold standard.
• Another important advantage claimed for the gold standard is that it preserves and maintains the stable rate of foreign exchange.
• The gold standard provides a common medium for international payments. It establishes an international measure of value.
• It is further claimed that gold standard helps to admit the balance of payments between countries automatically. Government interferences, by exchange control or otherwise, is not necessary.
• Under gold Standard the price level and the rates of foreign exchange are determined automatically.
• A gold standard inspires public confidence and confers prestige on the country having it.
Demerits of Gold Standard – The gold standard had the following demerits :
• The gold standard did not secure stable prices or stable exchange rates.
• The pure gold standard is very costly.
• Gold standard is that it affect investment.
• It caused fluctuations in the rate of interest.
• Under gold standard, currency cannot be expanded in response to the requirements of trade. The supply of currency depends on the supply of gold. But the supply of gold depends on the success of mining operation.