OMG – we’re back to the gold standard

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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 ‚Äòforever’.

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.