Monetary standard

Overall there can be two main kinds of monetary standards – metallic standards and paper standard.  1) METALLIC STANDARD Under metallic standard, the monetary unit is determined in terms of some metal like gold, silver, etc. Standard coins are made out of the metal. Standard coins are full-bodied legal tender and their value is equal to their intrinsic metallic worth. The important thing to note is that to be on a metallic standard a country must keep – (a) its monetary unit at a constant value in terms of the selected metal, and (b) its various types of money convertible into the selected metal at constant values. Metallic standards themselves can be of two types – monometallism and bimetallism. A] Monometallism :-  Also known as Single Standard, here only one metal is adopted as the standard currency/money. The monetary system is made up of and relies entirely on one metal, like say the gold standard or the silver standard. So coins are made up of one metal only.  This ...

  A monetary standard is  a set of institutions and rules governing the supply of money in an economy . These rules and institutions collectively constrain the production of money. Through its constraints on money creation, the standard indirectly acts on prices The term “monetary standard” refers to the monetary system of a country.  Prof. Halm defines monetary standard as the “principal method of regulating the quantity and the exchange value of standard money.” CHARACTERISTICS OF IDEAL MONETARY STANDARD A sound monetary standard or system should possess the following qualities. 1. Simplicity: The monetary system should be simple and easily understandable. A simple monetary system inspires public confidence. 2. Elasticity: A good monetary system should be elastic. It should be capable of changing the money supply according to the requirements of the economy. 3. Economical: The monetary system should be economical. It should not require heavy expenditure on its operation...

 MERITS (1) ECONOMICAL:- Since under paper standard no gold coins are in circulation and no gold reserves are required to back paper notes, it is the most economical form of monetary standard. Even the poor countries can adopt it without any difficulty. (2) PROPER USE OF GOLD:- Wastage of gold is avoided and this precious metal becomes available for industrial, art and ornamental purpose. (3) ELASTIC MONEY SUPPLY:- Since paper money is not linked with any metal, the government or the monetary authority can easily change the money supply to meet the demand. (4) ENSURES FULL EMPLOYMENT AND ECONOMIC GROWTH:- Under this system, government is free to determine the monetary policy. It regulates the money in such a way that ensures full employment of the productive resources and promotes economic growth. (5) AVOIDS DEFLATION:- Under this system, a country avoids deflationary fall in prices and incomes which is the direct consequence of gold export. (6) USEFUL DURING EMERGENCY:- This syste...

 Different countries have adopted different methods of note issue. Important methods among them are:-  (1) SIMPLE DEPOSIT SYSTEM Under this system, the paper currency notes are fully backed by the reserves of gold or silver or both. It is based on the currency principle of note issue. It involves no danger of over issue of currency and commands maximum degree of public confidence. But this system has never been practised because it is very costly and has no elasticity of Money supply. (2)  FIXED FIDUCIARY SYSTEM Under this system the central bank is authorised to issue only a fixed amount of currency notes against government securities. All notes issued in excess of this limit should be fully backed by gold and silver reserves. Fiduciary issue means the issue of currency notes without the backing of gold and silver. This system was first introduced in England and India followed it between 1862 to 1920. MERITS:-  (1) It ensures convertibility of currency notes. (2) It...

  PRINCIPLE OF NOTE ISSUE To ensure a good note issue system, two principles of note issue have been advocated:-  (a) CURRENCY PRINCIPLE (b) BANKING PRINCIPLE (A) CURRENCY PRINCIPLE :-  It is based on the assumption that a sound system of note issue should command the greatest public confidence. This requires that the note issue should be backed by 100% gold or silver reserves. Or in other words, paper currency should be fully convertible into gold or silver. Thus, according to this principle, the supply of paper currency is subjected to the availability of metallic reserves and varies directly with the variations in the metallic reserves. MERITS:-  1) It has maximum public confidence 2) There is no danger of over issue of notes leading to inflation 3) It makes the paper currency sstems automatic and leaves nothing to the will of monetary authority. DEMERITS:- 1) It makes the monetary system inelastic as it does not allow the monetary authority to expand the supply a...

 MEANING It refers to a monetary standard in which inconvertible paper money circulates as unlimited legal tender. Under paper money standard, although the standard money is made of paper, both currency and coins serve as standard money for purpose of payment. The paper standard is known as MANAGED STANDARD because the quantity of Money in circulation is controlled and managed by the monetary authority with a view to maintain stability in prices and income within the country. It is also called FIAT STANDARD because paper money is inconvertible in gold and still regarded as full legal tender. After the breakdown of gold standard almost all countries of the world shifted to paper standard. FEATURES The paper standard has the following features:-  1) Paper money circulates as standard money and accepted as unlimited legal tender in the discharge of obligations. 2) The unit of Money is not defined in terms of commodity. 3) The intrinsic value of the circulating money is particular...