Advantages and Disadvantages of Gold Standard

Vinish Parikh August 28, 2012

Gold standard refers to a system of maintaining gold reserves by countries central bank in order to maintain the exchange rates and also government have to stock more gold before issuing fresh currency into the country financial markets. This system is not followed presently, however in view of recent economic events like housing bubble, euro crisis, violent exchange rate volatility many people are advocating the use of gold standard. Given below are some of the advantages and disadvantages of gold standard –

Advantages of Gold Standard

  1. This system put brakes on government ability to print unlimited amount of money, and we all have seen how from past few years central banks like fed and ECB have been throwing money in the markets in order to save their economies but have been unsuccessful and biggest side effect of these policies have been inflation and speculation leading to more harm than benefits for the people of this globe.
  2. Extreme volatility in currency is not desired by any country and in the past currencies used to move 1 or 2 per cent during a month but in the past few months’ currencies of many countries have been moving 1 to 2 per cent in intraday trade and exchange rate fluctuation of this magnitude can lead to huge losses for companies and ultimately people will suffer due to it.
  3. Current monetary system increases inefficiency and wasteful expenditure by the governments because they know that they can print money whenever they want in order to reduce their fiscal deficit which is not possible under gold standard system.

 Disadvantages of Gold Standard

  1. Since gold is not divided equally it can lead to imbalances as countries having it as natural resource can exploit countries that have less gold reserves.
  2. Sometimes money supply is needed to push the economic activity as money can be force multiplier for economic growth which is not possible under this system.
  3. This system ties the hands of central banks and governments to tackle any economic catastrophe and therefore whenever such things happen it can lead to complete collapse of the world exchange system.
  4. The argument that it does not lead to inflation may not hold true in case of supply side inflation when there is general reduction in production of goods and services and also when there is natural calamity like famine, floods, tsunami etc…, leading to drop in production of agriculture production which increases the price of essential commodities leading to inflation.

Apart from above there are many other factors which have to be looked upon before deciding whether to switch to gold standard from current exchange system or not as one see there are both benefits and limitations of using gold standard system.