What are the Main Features, Merits and Demerits of Gold Coin Standard or Gold Species Standard?

Gold coin standard or gold currency standard or gold species standard is the oldest form of gold standard. It is also known as orthodox gold standard or traditional gold standard.

This standard was prevalent in the U.K., France, Germany and the U.S.A. before the World War I. Gold coin standard is also regarded as full gold standard because under these standard full bodies standard coins made of gold were circulated.

Other forms of money are redeemable into gold. According to Crowther: “A currency system in which gold coins either form the whole circulation or else circulate equally with notes is known as the full-gold standard.”

Features

(i) Monetary unit is defined in terms of gold. For example, before World War I, sovereign was the standard coin in the U.K. Its weight was 123.17447 grains with 11/12 purity.

(ii) Other forms of money (e.g. token coins and paper money) are also in circulation. But they are convertible into gold.

(iii) Coinage is unlimited and free of cost.

(iv) There is free and unlimited melting of gold coins.

(v) The government buys and sells gold at fixed prices and thereby maintains parity between the face value and intrinsic value of the standard coin.

(vi) There is free import and export of gold.

(vii) Gold is unlimited legal tender for all types of payments. All values are expressed in terms of gold.

Merits

The gold coin system has the following advantages:

1. Public Confidence:

Since the standard coin is made of gold, it is universally acceptable. Thus, gold coin standard enjoys full confidence of the public.

2. Automatic Working:

It is automatic in working and needs no government intervention. Money supply depends upon the volume of gold reserves and money supply can be changed in accordance with the changes in the volume of gold reserves.

3. Price Stability:

Since there are no frequent changes in the supply of gold, this system ensures reasonable degree of internal price stability.

4. Exchange Stability:

Free and unrestricted import and export of gold under gold coin standard ensures stability in foreign exchange rates. This promotes international trade.

5. Simplicity:

This is the simplest form of gold standard which can be easily understood by the common people.

Demerits

Gold coin standard suffers from the following defects.

1. Fair-Weather Standard:

It is fair-weather standard; it operates smoothly during peace times but fails to work properly and to inspire public confidence at the time of economic crisis.

2. Wastage of Gold:

There is great deal of wastage of gold under this standard. Circulation of gold coins suffers depreciation. Moreover, since paper currency is fully backed by gold, gold remains idle while in reserves.

3. Not Automatic:

Gold coin standard operates automatically with the cooperation of the participating countries. After World War I, in the absence of international cooperation, this standard ceased to be automatic in its functioning.

4. Price Stability Unreal:

Under this system, internal price stability is unreal. Various factors like discoveries of new gold mines, changes in the techniques of production of gold, changes in imports and exports of gold, lead to changes in the price of gold, and hence cause fluctuations in the internal prices.

5. Less Effective:

Gold currency standard is not the only standard for achieving the objective of price and exchange stability. Critics point out that a managed currency system is more effective in ensuring stability in internal price level and external exchange rate.

6. Deflation Oriented:

Mrs. Joan Robinson regards gold coin standard as deflation – oriented because the gold losing countries will compulsorily reduce the currency (thus generating deflation), while the gold receiving countries generally do not expand the currency (thus generating inflation).