Monetary Standard - Meaning and Types
Meaning of Monetary Standard
The term “monetary standard” refers to the monetary system of a country. Prof. Halm defines monetary standard as the “principal method of regulating the quantity and the exchange value of standard money.” When the standard money of a country is chosen in the form of some metal, then the country is said to have metallic standard. There are three main types of monetary standards. They are:
1. Monometallism or Single Standard
2. Bimetallism or Double Standard
3. Paper Currency Standard (Managed Currency Standard)
Monometallism or Single Standard
When only on metal is adopted as the standard money and is made legal tender for all payments, the system is known as monometallism or single standard. For example, now many countries have the Gold Standard. Suppose a country has adopted silver as the standard money, then it is said to have Silver Standard. For example, England was on Silver Standard until 1816.
Bimetallism or Double Standard
If two metals are adopted as standard money and if a legal ratio is established between the value of the two metals, then the system known as bimetallism or double standard. In other words, under this system, gold and silver circulated as legal tender money and there was a legally fixed ratio of exchange between them. Usually, two metals used under bimetallism are gold and silver. Bimetallism was adopted in France in 1803. Later on, it was adopted by other countries like Belgium, Switzerland and Holland. Bimetallism has certain advantages and disadvantages.
- It would secure greater stability of prices. It there is monometallism, the supply of only one metal could not satisfy the monetary demand satisfactorily. The increasing demand for money should be accompanied by an increase in the supply of money. Otherwise, there cannot be a stable price level. Therefore, if there is bimetallism, the supply of two metals put together will be steadier than that of any one of them. Just as two drunkards might walk more steadily when they walk hand in hand, the supply of two metals under bimetallism will make price level more stable.
- Bimetallism would promote stable exchange rates between countries using gold and countries using silver.
- The supply of gold would not be sufficient for the currency requirements if all countries adopted gold standard, that is, if they adopted universal monometallism.
- Bimetallism will keep world prices stable.
- There is a great difficulty in maintaining the mint ratio (legal ratio) between the two metals because market ratio will often fluctuate.
- Gresham’s law that bad money drives out good money will operate.
- Bimetallism cannot work if only one country adopted it. All countries in the world should adopt it.
- It may result in a lot of confusion, particularly, if there are differences between the legal ratio and market ratio of the two metals. So bimetallism may not remedy the defects of gold standard; it may increase the difficulties.
Paper Currency Standard (Managed Currency Standard)
Under the system, as the name indicates, the currency of the country will be in paper. Paper money consists of bank notes and government notes. Generally, under the system, the currency system will be managed by the Central Bank of the country. Hence, the system sometimes is referred to as managed paper currency standard. Almost all countries in the world have managed currency standard. The paper currency has certain advantages and disadvantages.
Advantages and Disadvantages of Paper Money
Paper money is economical. Its cost of production is negligible. It is convenient to handle and it is easily portable. It is homogeneous. Its supply can be made elastic. And its value can be kept stable by proper management. Paper currency can function very effectively as money, provided, there is proper control of it by the managing authority. It is ideal for internal trade. But for international trade and payments, gold is still found necessary.
However, paper money has two great disadvantages. There is the danger of over-issue of paper money by the managing authorities. Over-issue of currency will result in a rise in prices, adverse foreign exchange rates and many other evils. The over-issue of paper money has ruined many countries in the past. Another disadvantage of paper money is that it will not have universal acceptance. It is recognized as money only in the country where it is issued. For others, paper money is just bits of paper. Gold, on the other hand, has universal acceptance.
© 2013 Sundaram Ponnusamy