Pros & Cons of Commodity Back Currency
| 2011 | | Monetary economics assignment |
Pros and cons of commodity backed currency
Submitted to: Prof: Abid Raza
Submitted by: Group members
Name roll #
Adeel Obaid 64
Burhan Ali 24
Abid Daud 60
Pros and cons of commodity backed currency
Pros:
* Long-term price stability has been described as the great virtue of the commodity back standard. Under the commodity back standard, high levels of inflation are rare, and hyperinflation is nearly impossible as the money supply can only grow at the rate that the commodity supply increases. * Economy-wide price increases caused by ever-increasing amounts of currency chasing a constant supply of goods are rare, as commodity supply for monetary use is limited by the available commodity. High levels of inflation under a commodity back standard are usually seen only when warfare destroys a large part of the economy, reducing the production of goods, or when a major new source of commodity becomes available. * The commodity standard limits the power of governments to inflate prices through excessive issuance of paper currency. It provides fixed international exchange rates between those countries that have adopted it, and thus reduces uncertainty in international trade. Historically, imbalances between price levels in different countries would be partly or wholly offset by an automatic balance-of-payment adjustment mechanism called the "price specie flow mechanism“. * The commodity back standard makes chronic deficit spending by governments more difficult, as it prevents governments from inflating away the real value of their debts. A central bank cannot be an unlimited buyer of last resort of government debt. A central bank could not create unlimited quantities of money at will, as there is a limited supply of commodity.
Cons:
* The total amount of commodity like gold that has ever been mined has been estimated at around 142,000 metric tons. This is less than the value of
Pros and cons of commodity backed currency
Submitted to: Prof: Abid Raza
Submitted by: Group members
Name roll #
Adeel Obaid 64
Burhan Ali 24
Abid Daud 60
Pros and cons of commodity backed currency
Pros:
* Long-term price stability has been described as the great virtue of the commodity back standard. Under the commodity back standard, high levels of inflation are rare, and hyperinflation is nearly impossible as the money supply can only grow at the rate that the commodity supply increases. * Economy-wide price increases caused by ever-increasing amounts of currency chasing a constant supply of goods are rare, as commodity supply for monetary use is limited by the available commodity. High levels of inflation under a commodity back standard are usually seen only when warfare destroys a large part of the economy, reducing the production of goods, or when a major new source of commodity becomes available. * The commodity standard limits the power of governments to inflate prices through excessive issuance of paper currency. It provides fixed international exchange rates between those countries that have adopted it, and thus reduces uncertainty in international trade. Historically, imbalances between price levels in different countries would be partly or wholly offset by an automatic balance-of-payment adjustment mechanism called the "price specie flow mechanism“. * The commodity back standard makes chronic deficit spending by governments more difficult, as it prevents governments from inflating away the real value of their debts. A central bank cannot be an unlimited buyer of last resort of government debt. A central bank could not create unlimited quantities of money at will, as there is a limited supply of commodity.
Cons:
* The total amount of commodity like gold that has ever been mined has been estimated at around 142,000 metric tons. This is less than the value of
References: Chandler v. Lester,”the economics of money and banking”. Third edition, New York: Harper & brothers, publications, 1959, p.17-23. “Gold standard” Wikipedia: The free encyclopedia Wikimedia Foundation, Inc. 1 April 2011 at 22:45 <http://en.wikipedia.org/wiki/Gold_standard>