Gold Standard Game Rules
The successful working of the automatic international gold standard presupposes that there is no conscious management of the standard but that participating countries adhere to what is called the rules of the gold standard game. These rules are as follows:
1. There must be free import and export of gold between the participating counties.
2. The governments concerned must observe this golden rule of gold standard, viz. expand credit when gold is coming in, and contract credit when gold is going out. Thus, the gold receiving country must make arrangements for currency and credit expansion and the gold losing country for currency and credit contraction.
3. There should be a high degree of flexibility in the price systems of the participating countries, so that, when the monetary pressure of gold movement is exerted, price levels rise or fall, accompanied by smooth adjustments of costs.
4. There should be absence of distributing capital movements. The automatic operation of the gold standard can be ensured only when, among other things the investment policy of the lending counties remains uniform. Flights of capital are independent of the variations in the respective rates of interest and are capable of destroying the whole gold standard mechanism.
5. Although free trade is not an essential condition of a successful functioning of the gold standard, the game requires that there should be no severe restrictions on international trade. Particularly, import quotas hinder the automatic adjustment of gold standard mechanism.
6. The monetary authorities of the gold standard countries should maintain their gold parties by buying and selling gold in unlimited quantities at fixed rates. Moreover, the gold value of the domestic currency must neither be overvalued nor undervalued. It should also be stable.
7. Finally, the monetary authorities must be willing to conform to the rule of the game, even at the cost of sacrificing the conflicting aims of domestic monetary policy. The various independent objectives of monetary policy must be wholly subordinated to the international monetary motives. In Keynes’ words, the mechanism requires that “the main criterion of the banking policy of each country should be the average behaviour of all the other members it own voluntary and independent contribution being modest one”.