Symmetallism – Inconvertible Paper Or Flat Standard
Under the symmetallism standard, single standard money will be the combination of metals (rather than a single metal) in legally established proportions. The composition of the combination would be rigidly prescribed with a view to providing greater stability of value than would be possible with the gold alone. The currently according to this view would not be backed by, and convertible into gold or silver at the option of either the public or the central bank, but into gold and silver combined together in a bar of amalgam in the form in which they are made.
A price would be fixed or a quantity of good plus a quantity of silver and the central bank would be required to buy and sell this combination together and not separately, without limits. Bank reserve would also be calculated in terms of the combination, to allow relative price of gold and silver to change freely, provided their combined prices remained constant.
In this Alfred Marshall reasoned that it would be possible to use the combined supply of both metal as a basic for world currency. The problem with this system that if used it would not still protect us from excess of gold. There would also be the practical difficulty of forging the combination if this standard is applied in practice.
Inconvertible Paper Or Flat Standard
The paper standard dates from the more recent times, particularly the post depression period of the 1930’s. The many nations under the metallic standard were to learn through painful experience that money won’t always automatically mange itself in a satisfactory manner. Thus a monetary standard of the inconvertible type evolved. The standard is the diametric opposite of the metallic standard. The paper is cut off from any dependence on metal.
Essential Features Of this standard Includes;
- The definition of the basic monetary unity by a simple declaration of the unit without any reference to the precious metal.
- Absolute inconvertibility of circulating money into gold or silver or a combination of the two. In fact unlike metallic money it has little or not intrinsic value in itself. It is not redeemable in any commodity whose value is substantially equal to its own face value. Its purchasing power is not maintained at par with that of any commodity as gold.
- There is no free import or export of the precious metals. Actually, the introduction of a paper standard usually starts with the suspension of gold redemption of credit money outstanding. Besides too, the paper currency can be free, in which case, movement of government or its agencies (for example the central bank of Nigeria) except for the purpose of stability.
- The fiat or paper standard can also be controlled through legislation (for example the exchange control Act) guiding the movement of funds in and out of a particular country. A typical example of this controlled form of paper standard is the Nigerian Naira in the pre SAP era.
As it is the central bank of Nigeria is the only custodian of the currency or currencies both of the naira and other foreign currency exchange. Under the free paper standard, exchange dealing between currencies under the standard are relatively unrestricted.
Exchange rates are allowed considerable latitude to fluctuate but the government through the central bank of Nigeria reserves the right to exercise a steady influence through the operation of an exchange equalization fund. On the other hand, controlled paper standard implies that exchange dealings are strictly regulated. In Nigeria at present, we have floating exchange rates via the FOREX, but the dealing are strictly regulated.
Under the paper standard currency system, no metal is either purchased or sold at fixed prices by the central bank for monetary purposes. Rather the monetary authority carefully manages the money supply to achieve relative economic stability and national objective. In exchange, in essence its ability to purchase goods and services is low, and when the price level is low, the value of money is.
Hence, we can say that the value of money has an inverse relationship with the general price level. The value of money depends on the amount or quantity of different goods and services, which can be purchased, with a unity of money. In essence on the prices of these goods and services. There are several factors that determine price but one factor which easily caught and dominated the attention of economist in early times was the quantity of money supply in the economy.
It was their assumption then, that if the supply of money was doubled, automatically prices would double, thus prices varied in direct proportion to the quantity of money. This view is referred to as the crude theory of the quantity of money. We accept it as a fact that the total effect of demand on all market in the economy is one divisive factor in determining the value of the monetary unit.
For instance with the more money in circulation which are to be spent, buyers compete with each other and fore up the price of available goods to the point where the total supply can be cleared off the market. But note that an increase in the supply of money need not raise commodity prices if at the same time there is a restriction on the velocity of circulation of money. Or instance the suppose the monetary authorities increase the supply of money in response to a greater desire of the member of the public to hold money reserves, the additional money would be absorbed by large money reserves without an increase in expenditure and thus on prices.
Secondly, this position or argument by the theorist ignores a vital item, which is, the supply of goods and services to be exchanged during a period of time. Prices results from many prices making processes. It is by influencing these processes that the changes in the supply and demand for money influence the value of money or the pattern of relative prices.
Cause Of Changes In The Value Of Money Quantity Of Money
Changes in the value of money may result from a direct increase or decrease in the quantity of money supply. For instance newly created money may increase the money holding of individuals and firms and enable them to increase their demand for the unchanged supply of their goods and services. This will then drive up prices of their commodities and services. On the contrary, sterilization of money by the monetary authorities will reduce the money holding and/or spending of instruments for achieving this include, change in reserve requirements of commercial banks, open market operations, changes in interest rates, discounts and rediscount rates and marginal requirements among others these were not available or possible under the commodity standards.
Another feature of the paper standard is that money is issued or could be issued profusely for revenue purposes. The advocates of metallic money deride the users of the fiat standard, arguing that inconvertible paper money were usually associated with periods of panic, wars and widespread financial and economic stress as were evidenced in the “continental currency” of the American revolution, the “assignats” of the French Revolution, the “Greenbacks” of the American Civil War and the Biafran currency of the Nigerian Civil War. These currencies are cited by avocation of metallic standard to indicate that inconvertible paper standard are inferior to the metallic standard and thus should be avoided.
In response of the above position, the proponents of the paper standard argued;
- That these examples have been taken from periods of great economic disturbance and therefore could not be representatives of the real situation;
- That nations had always wanted metallism as long as the standard could be maintained without injury or prejudice to other national objective for instance full employment;
- That nations had introduced paper standard when war, panic and depression made it impossible for them to maintain metallic money.
The results of these two position is that today all monetary standard metallic as well as the inconvertible standards are highly managed and their success has depended more upon the quality of management than on the money substance.