What are the defects from which the Gold Standard suffers?

The gold standard suffers from the following defects:

1. Not Always Simple:

Gold standard in all its forms is not simple. The gold coin standard and, to some extent, gold bullion standard may be regarded as simple to understand.

But, the gold exchange standard which relates the currency unit of a country to that of the other is by no means simple to be comprehended by a common man.

2. Lack of Elasticity:

Under the gold standard, the monetary system lacks elasticity. Under this standard, money supply depends upon the gold reserves and the gold reserves cannot be easily increased. So money supply is not flexible enough to be changed to meet the changing requirements of the country.

3. Costly and Wasteful:

Gold standard is a costly standard because the medium of exchange consists of expensive metal. It is also a wasteful standard because there is a great wear and tear of the precious metal when gold coins are actually in circulation.

4. Fair-Weather Standard:

The gold standard has been regarded as a fair-weather standard because it works properly in normal or peaceful time, but during the periods of war or economic crisis, it invariably fails.

During abnormal periods, those who have gold try to hoard it and those who have paper currency cry for its conversion into gold. In order to protect the falling gold reserves, the monetary authority prefers to suspend the gold standard.

5. Sacrifice of Internal Stability:

The gold standard sacrifices domestic price stability in order to ensure international exchange rate stability. In fact, under gold standard, inflation and deflation respectively are the necessary companions to a favourable and an unfavourable balance of payments.

Give the world’s total monetary gold stock, an individual country’s monetary gold stock, and consequently, the money supply and the internal price level, changes by the inflow or outflow of gold as a result of international trade.

Thus the presence of external trade almost guarantees price instability under gold standard mechanism.

6. Not Automatic:

The automatic working of the gold standard requires the mutual cooperation of the participating countries.

But, during the World War I, because of the lack of international cooperation, all types of countries, those receiving gold as well as those losing gold, found it necessary to abandon the gold standard to prevent disastrous inflation on the one hand and even more disastrous deflation and unemployment on the other.

7. Deflationary:

According to Mrs. Joan Robinson, gold standard generally suffers from an inherent bias towards deflation. Under this standard, the gold losing country is under the compulsion to contract money supply in proportion to the fall in gold reserves.

But the gold gaining country, on the other hand, may not increase its money supply in proportion to the increase in gold reserves.

Thus, the gold standard, which necessarily produces deflation in the gold losing country, may not generate inflation in gold receiving country.

8. Economic Dependence:

Under gold standard, the problems of one country are passed on to the other countries and it is difficult for an individual country to follow independent economic policy.

9. Unsuitable for Developing Countries:

Gold standard is particularly not suitable to the developing economies which have adopted a policy of planned economic development with an objective to secure self sufficiency.