Saturday, September 5, 2009

The Gold Exchange Standard(1)

While government policy makers were mainly concerned about the effects of the gold standard on domestic economics, investors and commercial traders found that gold bullion was not a particularly convenient medium of exchange. Gold is bulky, expensive to transport, and risky to handle. Moreover, the world‘s gold supply was limited relative to the rapidly expanding volume of international trade. These problems gave rise in the 19th century to the gold exchange standard. Central banks, governments, major commercial banks, and other institutions actively engaged in international commerce began to hold stocks of convertible currencies. Each currency was freely convertible into gold at a fixed rate but also was freely convertible into other currencies at relatively stable prices. In practice, virtually all transactions took place in convertible currencies, while gold faded into the background as an international medium of exchange.
Without question, the gold exchange standard provided greater convenience for international traders and investors. However, that monetary standard possessed the same inherent limitations as the original gold standard. National currencies were still tied to gold, and growth in world trade depended crucially upon growth of the international gold stock. The gold exchange standard collapsed during the economic chaos of the Great Depression of the 1930s.

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