Explain the Gold Standard


The Gold Standard was the first universally implemented exchange rate system. It was
promoted by the Bank of England and established worldwide in 1870. The main features of
this system were as follows:
1. Every country was required to establish a Central Bank to function as the custodian
of the country’s monetary gold reserves.
2. Every Central Bank was to be provided the sole (exclusive) authority to issue paper
money (Bank Notes) within the area under its jurisdiction.
3. Each Central Bank was required to establish a fixed official price for gold in terms of
the domestic currency.
4. Every Central Bank was required to provide an irrevocable promise on each paper
note to redeem the same on demand in terms of specified quantity of gold.
5. Each Central Bank was required to provide an unconditional guarantee to buy and
sell unlimited quantity of gold at the fixed official price.
6. The total amount of money supply in circulation by way of Bank Notes was required
to be limited to the extent of the monetary gold reserves with the Central Monetary
Effectively Bank notes issued under the Gold Standard represented a proportionate
share in the monetary gold reserves held by the Central Bank.

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