The Strength of Gold Exchange Standard
History proved that gold and silver is most stable currency in the world. Since the early history of islam till today, the value of islamic currency is based on bimetal currency. It is very stable if compared to the value of staple food. Gold and silver are zero along this 14 century. Are there any currency like this?
There are several reasons why gold exchange standard is superior than others.
First, amount of money will be well controlled. This condition leads to stability of currency exchange.
Second, using gold exchange standard, a country is able to adjust Balance of Payment (BOP) in order to make balance of payment in equilibrium position even surplus. This mechanism is called Price Specie Flow Mechanism. When BOP is deficit, gold stock decreases. As the result, money supply domestic and price decrease. Therefore, local goods price is more competitive and export increases.
Third, gold maintains its intrinsic value from free fluctuation. For trade transaction, gold standard does not need hedging which is considered as a barrier for trading.
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