TYPES OF 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 means these coins are the legal tender for all day to day transactions. There is unlimited manufacture of coins, i.e. free coinage.
Monometallism can be of two types:
a. Silver Standard: Under silver standard, the monetary unit is defined in terms of silver. The standard coins are made of silver and are of a fixed weight and fineness in terms of silver. They are unlimited tender. There is no restriction on the import and export of silver. The silver standard remained in force in many countries for a long period.
India remained on silver standard from 1835 to 1893. During this period, Rupee was the standard coin. The coinage of the Rupee was free and people can get their silver converted into coins at the mint. Similarly, silver coins could be melted into bullion.
Silver standard lacks universal recognition as compared to gold standard. There is greater instability of both internal and external values of money under silver standard because silver price fluctuates more than that of gold. Thus, as far as the metal is concerned, gold is preferred to silver in most of the countries.
b. Gold Standard: Gold standard is the most popular form of monometallic standard; the monetary unit is expressed in terms of gold. The standard coins possess a fixed weight and fineness of gold. The gold standard remained widely accepted in most of the countries of the world during the last quarter of the 19th century and the first quarter of the 20th century.
The U.K. was the first country to adopt the gold standard in 1816. She was also the first to abandon this standard in 1931. Germany adopted the gold standard in 1873, France in 1878 and the U.S.A. in 1900. Gradually, gold standard disappeared from different countries and finally it was completely abandoned by the world by 1936.
(B) Bimetallism:- As the name suggests, in the double standard or bimetallism system, two metals are adopted as standard money. There is a fixed legal ratio between the value of the two metals to facilitate exchange. Usually, the two metals are gold and silver. So two types of standard coins are minted (gold and silver).
So under bimetallism, two types of metal coins are in circulation simultaneously in the economy. Both have free coinage. And using the legal ratio of exchange both are convertible into each other. One main advantage of this system is that the economy has a full-bodied currency. Silver can be used for the smaller transactions and gold for the bigger ones.
2] Paper Currency Standard
Under this monetary standard, the currency prevailing in the economy will be paper currency. In most cases, this currency system is managed by the Central Bank of the country, RBI in the case of India, and so we can also call it Managed Currency Standard. The currency consists of bank notes and government notes.
Most countries of the world follow this monetary standard. This is because it is a managed and controlled system. So an authority will monitor the quantity of money supply keeping in mind the stability in prices and income in the economy. It is also very economical in terms of production (currency notes). And they are far more convenient than metallic standards.
Features of Paper Standard:
The paper standard has the following features:
(i) Paper money (paper notes and token coins) circulates as standard money and accepted as unlimited legal tender in the discharge of obligations.
(ii) The unit of money is not defined in terms of commodity.
(iii) The commodity value (or intrinsic value) of the circulating money is particularly nil.
(iv) Paper money is not convertible in any commodity or gold.
(v) The purchasing power of the monetary unit is not kept at par with any commodity (say gold).
(vi) Paper standard is national in character. There is no link between the different paper currency systems.
(vii) The foreign rate of exchange is determined on the basis of the parity of purchasing powers of the currencies of different countries.
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