Chapter 11, Problem 1CTD

Summary Introduction

To discuss: The reason for the collapse of gold standard.

Introduction:

A monetary system wherein a standard currency unit is considered as a fixed gold quantity is termed as a Gold standard.  A particular country’s currency has a value directly associated with the gold.

Explanation of Solution

The reason for the collapse of gold standard is as follows:

The main reason of the gold standard collapse is that it did not enable economy growth of the countries.  At the time of the First World War, almost every country left the gold standard and financed their military payments (expenditure) by the way of printed currency.  This has resulted in inflation at the end of War in the year 1918. As a result, the price levels were very higher in every country.

Summary Introduction

To discuss: Whether there is any case for retuning to some type of gold standard.

Explanation of Solution

Determine whether there is any case for retuning to some type of gold standard:

A few countries have returned back to the gold standards immediately after the First World War. However, during the period numerous countries devalued their currencies, which became difficult to determine how much gold a currency could buy.

Later, the people of the country tried to exchange currency with gold instead of holding on to another country’s currency. This has put pressure on the gold reserves of numerous countries.  As a result, the gold standard has come to an end by the beginning of the Second World War. The greatest strength of the gold standard was that it contained a powerful mechanism for attaining a balance-of-trade equilibrium by every country. This strength is considered as a base for reconsidering the gold standard as a basis for global monetary policy.