What are the advantages and disadvantages of Gold Standard?


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ADVANTAGES OF GOLD STANDARD:
1. It was an easy system to introduce and operate.
2. It provided for a very high level of stability in exchange rates which promoted both
international investments and trade.
3. The Price Specie Adjustment Mechanism provided an in-built system for achieving
trade equilibrium.
4. It provided a fully secured system for settlement of international transactions.
DISADVANTAGES OF GOLD STANDARD:
1. The cost of manufacturing gold gradually increased to levels beyond the official
prices. This would result in stoppage of gold production which had an adverse effect
on international liquidity.
2. Countries with persistent trade deficit suffered from recessions resulting in reduced
investments and unemployment.
3. The system had no flexibility to adjust money supply in times of economic crisis such
as natural disasters, war, recession etc. In such situations the system had to be
repeatedly discontinued.
4. To avoid the negative effects of reduced money supply, countries would break the
equality between gold reserves and money supply, thereby diluting the system. (This
was called ‘Neutralisation’ of reserves) This resulted in the failure of the system in
1932.


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MT UVA BMS

MT UVA- University, Vocational and Affiliated Education for BMS

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