Question

Why was the gold standard developed? What problems did it appear to solve and what problems did it create? What is the difference between the gold standard and the gold exchange standard?

Answer 1

The gold standard was developed between 1696 and 1812, as the introduction of paper currency posed some problems. So, gold standard was developed, which allowed people to convert the money easily into gold.

The problems that the gold standard solved was that it helped limit inflation by limiting the Government to use paper currency.

The problems that gold standard created was that due to the fixed money and the economy growing , it led to massive deflation. The total amount of gold available worldwide is also small. Long periods of this strategy, without adequate gold supply can cause deflation.

In gold standard paper currency can be converted into gold at fixed prices. It can be very useful in making transactions internationally. We can convert our currency into gold both in the home country and internationally.

In gold exchange standard :

One country’s currency is converted to the equivalent value of another country’s currency provided that the second country’s currency can be converted to gold at a stable rate of exchange. There is no need to keep a surplus reserve of gold in this case.