After the breakdown of gold standard, a new monetary System called gold reserve standard, was developed in 1936 mainly to ensure stability in exchange rates.
In 1936, Great Britain, the U.S.A. and France entered into a Tripartite Monetary Agreement according to which free flow of gold or foreign currency was allowed to stabilise exchange rates and promote foreign trade without affecting the internal value of the domestic currency.
For this purpose, Exchange Equalisation Funds were created. The gold reserve standard functioned successfully for three years and came to an end with the outbreak of World War II.
The essential features of the gold reserve standard are:
1. No Link with Gold:
Under this standard, gold is used neither as a medium of exchange nor as a measure of value. The domestic currency is made of paper money and token coins. The convertibility of domestic currency into gold is not ensured.
2. No Free Movement of Gold:
Under this system, private individuals are not allowed to import and export- gold. The government monopolises the country’s import and export of gold. Gold is imported and exported only monetary purpose.
3. Exchange Equalisation Fund:
Under this standard, the participating countries have to setup Exchange Equalisation Fund for the purpose of maintaining stability in exchange rates. The Exchange Equalisation Fund, which is also known as Exchange Equalisation Account, comprises, besides local currency, foreign exchange and gold.
If the demand for foreign currency rises, the Fund will increase the supply of that foreign currency in the open market and thus will prevent any rise in the value of that currency in terms of other currencies.
4. Strict Secrecy:
The composition and movement of reserves of the Exchange Equalisation Fund are kept strictly confidential from the public.
5. Exchange Stability:
Under this standard, exchange rate stability is achieved without disturbing the internal economy of the member country.