Introduction
The gold standard is a monetary system where the typical financial unit of account is/was a set mass of gold. At the time they were in use, there were distinct standards. For instance, the first standard was the gold specie standard, followed by the gold exchange standard, after which came the gold bullion standard.
Reason for collapse
The collapse of the gold standard was majorly because of its failure to support international expansion. It came under international pressure in the 1930s when there were international engagements in competitive devaluations. The commencing of the First World War marked the collapse of the gold standard. There was inflation during the war because of the printing of notes to finance the war. By the end of the war, the price levels were extremely high to the extent that use of gold was irrelevant. International exchange rates due to the need for international economic expansion led to the denunciation of the use of gold as a standard exchange rate.
One would not assume that there is any case of returning gold standard because of continued world nations’ yearning to and aspirations to grow, which would be hampered by the set mass of gold as the standard measure that would back the monetary value.
Merits of Fixed and Floating Exchange Rate Regimes
Floating and fixed exchange rates cases lie solemnly on views regarding monetary discipline, uncertainty, speculation and the absence of connectivity between the exchange rates and the trade balance. The monetary discipline regards the urge to maintain fixed exchange rate parity to ensure that governments do not expand their money supplies to inflationary rates. Fixed exchange regimes also rule out the leeway for conjecture. It also brings in an amount of certainty in the international monetary system through reduction of volatility in the exchange rates. Critics also question the relationship between the exchange rates and trade balance. Floating exchange rates brings in two elements, which are the autonomy of monetary policy and trade balance adjustments that are automatic. The floating exchange regimes provide countries with autonomy regarding their monetary policies. In the fixed rate system, there is a limitation in a country’s ability to expand or contract its supply for money as it deems fit through the need to maintain the parity in the exchange rate.
