What are the Features, Merits and Demerits of Gold Bullion Standard?

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After World War I, Gold standard was revived in some countries of Europe not on gold currency basis but on gold bullion basis. It was adopted by Great Britain in 1925.

Gold bullion standard is a modified version of gold coin standard in which there was no gold coinage and the currency is convertible into gold bullion (i.e., gold bars).

Features

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(i) Gold coins are not in circulation. But the standard currency unit is expressed in terms of a definite quantity of gold of a given fineness. Thus, gold does not act as a medium of exchange, but it remains a measure of value.

(ii) Coinage of gold is not allowed, i.e., people cannot get their gold converted into coins at the mint.

(iii) Other forms of money (paper money and token coins) are not fully backed by gold reserves. But the government guarantees full convertibility of currency into gold bullion.

(iv) The government is always ready to buy and sell gold at fixed prices. For example, in England, during 1925 to 1931, the currency was exchangeable for gold bars of 400 ounces, each worth about £1560

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(v) There are no restrictions on export and import of gold.

Merits

The gold bullion standard has the following merits.

1. Economy in the Use of Gold:

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The gold bullion standard economies the use of gold. Gold coins are not in circulation and there is no wastage of the precious metal. Moreover, there is no hundred per cent gold backing of note issue.

2. Use of Gold in Public Interest:

Since, under gold bullion standard, all gold is not kept idle in reserves, it can be properly utilised for public purpose.

3. Automatic Working:

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Like the gold currency standard, the gold bullion standard also operates automat­ically. If demand for money falls people will start “buying gold from the government. As a result, gold reserves, and thus the money supply, will fall.

In this way, equilibrium in the demand and supply of money will be established, and hence price stability is ensured.

4. Exchange Stability:

Since there is unrestricted import and export of gold, stability in the exchange rate is easily maintained under this standard.

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5. Elastic Money Supply:

Since, under this system, the currency is not fully convertible the monetary authority can expand adequate money supply by a small increase in gold reserves.

6. Public Confidence:

Since government is always ready to convert token money and paper money into gold at fixed price, the gold bullion standard inspires public confidence.

7. Simplicity:

Gold bullion standard is easy to understand and economical in functioning.

Demerits

Various drawbacks of gold bullion standard are given below:

1. Fair-Weather Standard:

Like gold coin standard, gold bullion standard also fails to work at the time of economic crisis. It loses public confidence during war periods when the demand for gold increases and the government reserves are not sufficient to meet this demand.

2. Government Intervention:

Gold bullion standard cannot function properly without government inter­vention. In a way, it is a managed currency system because under this system the government manages the token money, paper money and gold reserves.

3. Uneconomical:

Under this system, enough gold reserves are kept. They remain idle and cannot be put to productive uses.

4. Less Public Confidence:

As compared to gold coin standard, the gold bullion standard inspires less public confidence because gold coins are not in circulation. The currency is generally converted into gold only for foreign exchange purpose and not for domestic purpose.

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