The International Monetary Fund Vs. Gold Standards

The international Monetary Fund vs. Gold Standards There is no doubt that the I.M.F. is a vast improvement on the gold standard. To maintain a gold standard was a very costly affair and it was also unnecessary. What matters is that a currency syst

The international Monetary Fund vs. Gold Standards

There is no doubt that the I.M.F. is a vast improvement on the gold standard. To maintain a gold standard was a very costly affair and it was also unnecessary. What matters is that a currency system retained the confidence of the people and should provide stability of its internal and external value.

There should be no crisis of confidence. Under gold standard, the currency system depends on the volume of gold output or the acquisition of gold. A scramble for the yellow metal led to its misdistribution and the breakdown of the gold standard. Under intense economic nationalism, it became almost impossible to make the countries observe the "Rules" of the Gold Standard.

The I.M.F. has all the merits of gold standard minus its demerits. It ensures exchange stability without a country having to undergo the expense of maintaining a costly currency system. The exchange parities are fixed in terms of gold but it is unnecessary to keep large gold reserves for currency purposes. The I.M.F. provides multilateralism, because the I.M.F. encourages multilateral transactions. Under the gold standard, a country having a net deficit in the balance of payments had to export gold to meet this deficit. But under the I.M.F., this function of gold is performed by I.M.F. quota. Under the gold standard, there are no trade restrictions. The I.M.F. also seeks to restore multilateral trade on the basis of freely convertible currencies and reasonably stable exchanges.

Another serious defect of the gold standard (which is avoided by the I.M.F.) was that exchange stability was made the first objective of the monetary policy and it was maintained by deflation of credit in the country losing gold. The country receiving gold was expected to expand-credit. This method of maintaining equilibrium in the balance of payments worked successfully only so long as wages and other costs were flexible. But now these costs have become more and more rigid due to trade union pressure. In these circumstances, deflation paralyses economic activity. The I.M.F. avoids these rigidities. There, is, of course, a provision for change of rates of exchange, if circumstances warrant.

In short, the I.M.F. combines the advantages of gold standard with those of free exchanges.

0 comments

Add a comment

0 answers +0 votes
Post comment Cancel