By Robin Harding in Washington
Published: November 8 2010 18:03
Reactions to World Bank president Robert Zoellick’s suggestion that gold might be used as part of a package of measures to reconstruct the international system ranged from the lukewarm to the bewildered.
Writing in the Financial Times on Monday, Mr Zoellick called for a “co-operative monetary system that reflects emerging economic conditions”. He said that system “should also consider employing gold as an international reference point of market expectations about inflation, deflation and future currency values”.
“Although textbooks may view gold as the old money, markets are using gold as an alternative monetary asset today,” Mr Zoellick wrote.
Fred Bergsten, director of the Peterson Institute for International Economics in Washington, said that Mr Zoellick’s overall approach was “very sensible” but that the idea of using gold was “minor and really irrelevant”.
The world does need new international “rules of the game” as it evolves towards a system that uses multiple reserve currencies rather than just the dollar, Mr Bergsten said, but gold should not be part of it.
“I happen to think that gold is a very poor reference point because it fluctuates so widely,” he said.
Gold prices have risen from close to $200 a decade ago to almost $1,400 today. The rapid rise in recent years reflects fears that unconventional central bank policies – such as last week’s move by the US Federal Reserve to expand its balance sheet by another $600bn – could lead to inflation.
But inflation rates in most industrialised countries have fallen since the start of the financial crisis. Other measures of inflation expectations, such as surveys and the yields on inflation-protected bonds, do not suggest a surge in inflation is likely.
“I think [Mr Zoellick] is living in the past, in particular in the period from 1980-92, when there was a periodic flirtation with gold,” said Edwin Truman, senior fellow at the Peterson Institute. “It’s not constructive and it’s inappropriate.”
Jean-Claude Trichet, president of the European Central Bank, said that central bankers meeting in Basel had not discussed the use of gold. “We did not discuss the gold standard,” he said. “In my memory such an idea was mentioned a long time ago by Jim Baker when he was a [US] secretary of the Treasury in the 1980s. I have no particular comment.”
A return to the use of gold as a backing for money has support from some economists and investors who particularly fear inflation, because a central bank cannot create more of it. But Mr Zoellick’s comments brought out a host of criticisms of the gold standard that have rarely been aired since the 1930s.
“The last thing that the world economy needs right now is another source of deflation in a financial crisis,” wrote Bradford DeLong, professor of economics at the University of California, Berkeley, on his blog. “Attaching the world economy’s price level to an anchor that central banks cannot augment at need is another source of deflation – we learned that in the 15 years after world war one.”
Edel Tully, an analyst at UBS, reprised a 19th century argument about the gold standard. “Any reserve currency needs a supply that can grow as rapidly as global trade. Gold supply falls significantly short of this basic requirement,” she wrote in a report.
Copyright The Financial Times Limited 2010.
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