The gold exchange standard, still another form of gold standard, was adopted by many gold scarce countries as a gold economising device. Holland was the pioneering country in adopting gold exchange standard in 1871.
In the last decade of the 19th century, Austria, Hungary, Russia and India also adopted the gold exchange standard. India discontinued it in 1926 at the recommendation of the Hilton Young Commission.
Under this system, the domestic currency standard was composed of paper standards and token coins, but the monetary authority was not obliged to convert its currency money into gold coins or gold bullion.
The external value of the currency unit of gold exchange standard country was determined in terms of some foreign currency which was based on the gold standard.
For example, the value of the Indian rupee in 1892 was expressed in terms of the British Pound at Re 1 – 1 sh. 4 d. Thus, the value of such currency was indirectly linked to gold, as it was convertible into a foreign currency based on the gold standard.
Apparently, the monetary authority of the country on gold exchange standard had to maintain a sufficiently large amount of foreign exchange reserve, in addition to the gold reserves.
The following are the chief merits of the gold exchange standard:
1. A Practical System:
It is a practical device for economising values of gold in adopting the gold standard in a monetary system. It may be compared to the adoption of “the payment of balances between banks at the clearing house by cheque instead of with currency,” says Hawtrey.
2. Economy of Gold:
It economises the use of gold, since it dispenses with the internal circulation of gold coins. This enables the government to release gold for better uses in public interest.
3. Elasticity of Money Supply:
It enables the government to make money supply more elastic and perfectly adjustable to the economic needs, for it does not require keeping of 100 per cent gold reserves for issuing notes.
4. Suitable to LDCs:
It is much suited to poor countries having scanty gold reserves.
5. Least Cost:
It entails all the advantages of the gold standard at the least cost.