Gold standard and its advantages and disadvantages
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It provides a self-regulating and stabilizing effect on the economy. The government can only print as much money as its country has in gold. That discourages inflation, which is too much money chasing too few goods. It also discourages government budget deficits and debt, which can't exceed the supply of gold.
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Gold standard, monetary system in which the standard unit of currency is a fixed quantity of gold or is kept at the value of a fixed quantity of gold. The currency is freely convertible at home or abroad into a fixed amount of gold per unit of currency.
The advantages of the gold standard are that (1) it limits the power of governments or banks to cause price inflation by excessive issue of paper currency, although there is evidence that even before World War I monetary authorities did not contract the supply of money when the country incurred a gold outflow, and (2) it creates certainty in international trade by providing a fixed pattern of exchange rates.
The disadvantages are that (1) it may not provide sufficient flexibility in the supply of money, because the supply of newly mined gold is not closely related to the growing needs of the world economy for a commensurate supply of money, (2) a country may not be able to isolate its economy from depression or inflation in the rest of the world, and (3) the process of adjustment for a country with a payments deficit can be long and painful whenever an increase in unemployment or a decline in the rate of economic expansion occurs.
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The advantages of the gold standard are that (1) it limits the power of governments or banks to cause price inflation by excessive issue of paper currency, although there is evidence that even before World War I monetary authorities did not contract the supply of money when the country incurred a gold outflow, and (2) it creates certainty in international trade by providing a fixed pattern of exchange rates.
The disadvantages are that (1) it may not provide sufficient flexibility in the supply of money, because the supply of newly mined gold is not closely related to the growing needs of the world economy for a commensurate supply of money, (2) a country may not be able to isolate its economy from depression or inflation in the rest of the world, and (3) the process of adjustment for a country with a payments deficit can be long and painful whenever an increase in unemployment or a decline in the rate of economic expansion occurs.
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