What are the Demerits of the Gold Exchange Standard?

The following are the drawbacks of the gold exchange standard:

1. A complex system:

It is a complex and complicated form of monetary system which is unintelligible to the common people.

2. Lack or full confidence:

Since domestic currency is not directly linked with gold, it fails to win full public confidence.

3. No automatic working:

It does, not function automatically. It needs active and alert government intervention constantly. It is rather a managed standard.

4. Prone to inflation:

This system is prone to inflation. There are chances of over-expansion of money supply by the government through fiduciary issues.

5. Instability:

It involves inherent instability and insecurity when the foreign currency to which it is pegged becomes unstable and insecure.

The gold exchange standard was scrapped when the breakdown of gold standard took place in the thirties.