Question

In th eory, how is the gold standard supposed to work? How did practice differ from theory during the height of the gold standard (1870–1914)? Discuss the main difficulties policymakers faced when they tried to restore the gold standard after the end of World War I.

Answer 1

Gold standard is a monetry system where countary currency have directly linked to this .with the gold standard countary agree to convert paper money into a fixed amount of gold.

Gold standard operated in the underlying assumptions------

1. Emphasis on relative price level.

2. demand is a price elastic.

3. goverment must be committed to the rules of the gold standard.

4. Required goverment to give up monetry policy.

How it worked in practice---------

1. operated in technocrats.

2. sterling was used interchangeably.

3. long term capital movement were used to offset , rather than price changes.

Role of the british hegemoney----

1. Britain was the regulator of the gold standard and the international payment system.

Following are the difficulty policymaker faced when they tried to restore the gold standard after the end of world war 1------------

1. conflict between external stability and domestic stability.

2. Full employment become much more important than the external stability.

3 Printing money to support war effort greatly expanded money supply. old parities restored but money supply kept the same.

4. Gold was unevenly distributed.