0 Pooja Sharma Asked: July 16, 2019In: Commerce Distinguish between gold standard and gold exchange standard 0 International Business Finance 1 Answer Voted Oldest Recent Best Answer admin Added an answer on July 16, 2019 at 11:43 pm The first modern international monetary system was the gold standard. The gold standard provided for the free circulation between nations of gold coins of standard specification. Under the system, gold was the only standard of value. The groundwork of the gold standard is that a currency’s cost is supported by some weight in gold. Under the gold standard system and based on its gold value, all participating currencies were convertible. Because currencies were convertible in gold, then nations could ship gold among them to adjust their “balance of payments.” In theory, all nations should have an optimal balance of payments of zero, i.e. they should not have either a trade deficit or trade surplus. At the turn of the 20th century, many major trading nations used the gold standard to adjust their monetary supply. However, the processes of the gold standard in reality lead to many issues. The operation of the gold standard in reality caused many problems. When gold left a nation, the ideal balancing effect would not occur immediately. Instead, recessions and unemployment would often occur. This was because nations with a balance of payments deficit often neglected to take appropriate measures to stimulate economic growth. Instead of altering tax rates or increasing expenditures – measures which should stimulate growth – governments opted to not interfere with their nations’ economies. Thus, trade deficits would persist, resulting in chronic recessions and unemployment. With the eruption of the First World War in the year 1914, the international trading system busted out. Government of respective nations took their currencies off the gold standard and simply ordered the value of their money. Subsequent to the war, few nations tried to re-establish the gold standard system at pre-war rates, but drastic changes in the global economy made such attempts ineffective. This leads to rise of Gold Exchange Standard. Under this new system, currencies would be transferable not in gold but in the leading post-war currencies of the associated nations. Because the world currencies were still exchangeable for gold, the “gold-exchange” standard became the existing monetary exchange system for several years. However, due to the post war effects and the revival of other economies, many nations could no longer comply to exchange currencies for gold. Hence, gold supply rapidly declined. And only the severity of World War could lead to re-establishments of the economy. The effect of the gold-exchange system was to make the United States the center for international currency exchange. However, due to the inflationary effects of the Vietnam War and the resurgence of other economies, the United States could no longer comply with its obligation to exchange dollars for gold. Its own gold supply was rapidly declining. In 1971, President Richard Nixon removed the dollar from gold, ending the predominance of gold in the international monetary system. 0 Reply Share Share Share on Facebook Share on Twitter Share on LinkedIn Share on WhatsApp Leave an answerLeave an answerCancel reply Featured image Select file Browse Save my name, email, and website in this browser for the next time I comment.