The domestic gold standard basically aims at controlling the volume of currency and the stability of the domestic price level. For this purpose gold coins or the backing of gold are deemed essential in the monetary system.
When domestic money supply is directly linked with gold, it bears an automatic check on over expansion of the currency by the government.
The advantages of the domestic gold standard may be mentioned as follows:
1. Public confidence:
It enjoys extra confidence of the public in the monetary system.
2. Automatic working:
It makes the monetary system operating automatically and thus avoids the need for extensive monetary control by the government or the monetary authority.
3. Price Stability:
It provides greater price stability than otherwise (where the monetary system is not based on gold).
Critics, however, feel that the domestic gold standard or keeping of minimum gold reserve is an arbitrary and a wasteful method of controlling the volume of money in a country.
With the changes in the volume of gold reserve, the volume of currency tends to change rather than stabilise. Crowther remarks thus: “The domestic standard is, at best, only a clumsy way of doing what could be done much better by other methods, if indeed it has to be done at all.”
He further states that, “the gold standard was never ‘invented’ to serve any conscious purpose. What we have called its domestic functions arose quite naturally out of the distrust with which paper money was regarded in a world whose money was mainly of metal.
If notes were to be allowed alongside gold, the greatest care had to be taken to see that they were merely substitutes for gold, that they were not issued in excessive quantities, and that the gold for redeeming them was always present.”
The major drawbacks of the domestic gold standard may be mentioned below:
It is a fair weather standard. It creates chaos when suspended during economic emergency periods.
It does not operate automatically. And when it operates, it creates more harm than any good.
3. Price stability is not guaranted:
There are no specific reasons to believe that the gold standard can promote price stability. On the contrary, increase in the stock of gold reserves may cause expansion of money supply with its inflationary impact.