Published: November 8 2010 10:06
Last updated: November 8 2010 20:48
Should the world crucify itself on a cross of gold once more? The easy answer to the question raised by World Bank president Robert Zoellick in his Financial Times article is plainly “no”. The gold standard cannot be brought back. His subtler question, of whether a global system to manage exchange rates is possible, is harder. But again the answer is “no”.
While the Bretton Woods gold standard fixed capitalist countries’ currencies to the dollar, which was convertible to gold at $35 per ounce, the world enjoyed a quarter century without asset bubbles and with relatively shallow recessions.
Since it ended in 1971, gold’s price has spiralled in all currencies, with the partial exception of the yen, showing that currencies have been debased. The oil price, which in spite of much volatility has remained roughly pegged to gold since 1971, lends credence to the notion that gold is a store of value.
But Bretton Woods required the catalyst of a world war. It ceased when the US found the burden of dollar convertibility to gold unbearable. Since then, the capitalist world has grown many times over while the gold supply has been almost fixed. A return to the simple old gold standard would be viciously deflationary – and politically impossible.
For these reasons, Mr Zoellick suggests something less ambitious, that the gold price could be a “reference point”. Currencies could perhaps move within wide bands against a reference basket which included the gold price?
This sounds appealing but the history of currency boards, pegs (crawling or otherwise) and exchange rate mechanisms post-Bretton Woods has been uniform: they come to grief because it is too easy to bet against them. Without draconian controls on investors, as well as on central banks, a second Bretton Woods cannot work.
Copyright The Financial Times Limited 2010.
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