As the FT has noted, Robert Zoellick, president of the World Bank, has called for the re-establishment of the gold standard.Admittedly, this is not the gold standard of old, but it is a gold standard nonetheless.
Martin Wolf anticipated this in a column for the Financial Times last week. As he put it (quoting others on the way):
Historically the gold standard provided a reasonable degree of price level stability over long spans of time because the population at large had at that time a semi-religious belief that the price of gold should not be varied but should be maintained ‘forever’.
That faith has perished. Moreover, everybody knows it has perished. So whenever the economy was in difficulty, the only question would be how soon the gold price would be changed or the link abandoned.
In short, we cannot and will not go back to the gold standard. As L.P. Hartley wrote, “The past is a foreign country: they do things differently there.” We cannot live in the 19th century. It is foolish to pretend that we can.
That is, in some ways, as much as needs to be said,but the fact that Zoellick that raised the issue suggest that it will be on the agenda for a little while to come.So, let's consider the facts.
First, those countries that start with the gold standard in the 1930s suffered most in the recession of that period.
Second, as Martin Wolf notes, there is no prospect of recreating the gold standard. It would be substantially more useful to return to Bretton Woods Mark One and create mechanisms for restoring current-account balances . That is what is needed.
Third, the underlying politics of this have to be considered. There is at the core of this demand a belief that restoring the value of monetary wealth, in the interests of those who hold it, is more important than creating new wealth in the interests of those whose labour would be engaged in making it. In other words, preserving existing patterns of wealth and power in society is more important, according to Zoellick and others who will support his view then is creating employment, real wealth, a fairer society, greater equality in the income distribution and higher prosperity for all.
Seen in that light, what Zoellick demands is not economic reform, but social retrenchment. It's a choice, but it's the wrong choice.
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No currency has ever been, or ever could be, ‘anchored’ to anything. There is simply no process by which this could be achieved. It is instructive to try to imagine such a process. Would the head of the United Nations stand on a soapbox with a very large loudhailer, and make a ‘proclamation’ that the value associated with the dollar would from now on be linked to the value of 1/20th of an ounce of gold (1791-1933) or 1/35th of an ounce of gold (1933-1971), or even to some more abstract concept such as ‘a unit of labour’. Would the head of the United Nations then ‘exhort’ the population at large to ‘bear that in mind when shopping’? Would na?Øve shoppers have to start evaluating their potential purchases for worth against the value-density of gold, or even to some more abstract concept such as ‘a unit of labour’? If a shopper wanted to buy a good at a higher price than last week (assuming they could remember historic prices and qualities), would they have to also select something else at a lower price than last week before they were allowed to purchase? Surely, logic and history has long since established that na?Øve economic agents in the market fail to notice, fail to understand, or simply ignore, any such ‘proclamations’ and/or ‘exhortations’. Whenever there has been such a linkage (extremely rare in practice), it has always been the other way round:
1. The value associated with the currency was always the exogenous factor in any such linkage (i.e. it was the externally-determined given). The value associated with each currency was determined on a rolling macro-economically-incidental basis by millions of naive economic agents agreeing millions of prices each day (see later).
2. The value-density of the commodity concerned (‘money’ or non-‘money’ without distinction) was always the endogenous factor in the linkage (i.e. it was always determined by wilful policy). Invariably, there was ‘interference’ by ‘the authorities’ (such as the Bretton Woods agreement); interference which amounted to a crude attempt to rig the market in the commodity concerned (‘money’ or non-‘money’ without distinction). Such agreements established closed networks of ‘responsible’ and ‘bottomless’ suppliers and demanders (i.e. central bankers) who all colluded in agreeing to ‘transact’ (i.e. buy and sell) at a ‘proclaimed’ price irrespective of supply and demand in the ‘free’ or ‘black’ markets. All such agreements persisted only until ‘free’ market sentiments moved too far against them, and then capitulated (e.g. the UK in 1918 and 1931, and the US in 1933 and 1971). Without such ‘interference’ by ‘the authorities’, the very idea of such a linkage would have been a deceit. There would always have been a ‘going price’ in the ‘going currency’ for each precious coin based on its (assumed) content and/or its ‘collector’s valuation’ (and irrespective of its ‘face’ value). Thus, the Bretton Woods agreement should be seen not as an attempt to anchor the value associated with the US Dollar to the ‘market’ value of some form of gold ‘money’, but as an (ultimately futile) attempt to rig the ‘market’ value of gold (‘money’ and non-‘money’ without distinction) in line with the value associated de-facto with the US Dollar.