Major Problems With The Gold Standard Generally
The smooth operation of the gold standard depends on the flexibility of prices and the general operation the country’s economy. Money supplies, adjust where there are differences in prices either between the commodity prices in the market or the official price which the commodity id obtained, or between the price levels in different countries in contention. When money supplies are adjusted, the intent is to effect changes in prices which can either be a positive change or a negative change.
If prices failed to change as a result of the adjustment in the money supply, the system would function inefficiently. Again, if domestic prices do not change in the same direction as formerly proposed and by the same proportion, services disruptions can occur in an economy.
For gold standard, there was a problem that when prices fell, they did so in different proportions, for instance, money wages do not often fall at the same rate as the prices of other goods and services. The result of a decrease in money supply therefore was reduction in commodity prices but an increase in real output in the economy, this can also work vis-a-vis.
Hence, given the choice between maintaining as well as sustaining the gold standard with attendant unemployment being experienced whenever the money supply is reduced and abandoning the standard in order to maintain a relative full employment in the country, countries have chosen to abandon the system. A lack of price flexibility in a country could thus make the gold standard politically unaccountable, and this will cause some different level of problems.
Secondly, and still related to the forging reason is the fact that the gold standard does not stabilize all the prices as so many will believe it does. It is only used to stabilize the price of gold by keeping it at the official price declared or fixed by the authorities or the body in charge of pricing. Consequently it is possible for a country to suffer severe inflation even while maintaining gold standard. If a cheaper source of gold is discovered there will be a gold rush.
Meaning Of Gold Rush (Gold Standard)
Gold rush is a situation where people will purchase the cheap gold or simply mine it and then exercise their right to free coinage. The effect will be an increase in money supply and thus prices of commodity will be affected. Prices will continue to push upwards until the cost of the newly discovered gold equals the official price of gold.
The gold bullion standard also poses problems with international payments. Since the supply is infinite, a problem might arise with limited availability of liquid assets in the form of gold to finance an expansion of international trade. Moreover, through international payments, the money supplies of the gold countries are linked. The benefits of the fixed and stable foreign exchange rates are realized only at a cost, in essence in terms of loss of control over domestic economic conditions.
As inflation that develops in one country will be transmitted to the one in another country, as gold flow to other countries with lower prices. In the face of thee problems, countries may choose to abandon the gold bullion standard to insulate their domestic economic conditions from prevailing conditions abroad. In its place they may introduce a managed standard with many social and political objectives other than the maintenance of stable exchange rate.
By introducing deliberate management of the currency, the monetary authorities can now alter the effects of foreign exchange flows on the total money supply by using monetary and credit controls or by resorting to direct control of capital movements, and of trade and payments in order to balance their national receipts and other important payments.