Robert Zoellick, president of the World Bank, shook up the world of international finance and central banking on Monday when he called for consideration of tying currency values to the global trade of gold, in hopes of producing more stable economies.
Basically, he called for the G20 to discuss establishing a global gold standard as part of an ongoing refashioning of financial markets — and his remarks sent prices of the shiny metal soaring.
Gold, he wrote in an editorial published by The Financial Times, could be “employed 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.”
Zoellick said the modified gold standard could play a key role in the third reformatting of the global monetary systems since World War II and the Bretton Woods Agreement.
He added that whatever system emerges would “likely to need to involve the dollar, the euro, the yen, the pound and a renminbi that moves towards internationalization.”
Zoellick’s remarks come ahead of the G-20 meeting in S. Korea, where the issue of quantitative easing is sure to be a hot topic. Quantitative easing is a term used to describe the effect of a central bank that dilutes a currency’s value by injecting even more currency into the system.
The practice, which the US Federal Reserve is about to begin anew, has led to talk of an international “currency war,” with the world’s most powerful economies reducing the values of their currencies to compete with each other.
“The world has seen an international gold standard before, during the interwar years and between 1875 and 1914; England was the first country to adopt a gold standard in 1821,” Forbes reporter Parmy Olson noted. “But in 1971 President Richard Nixon abandoned the system established under the Bretton Woods Agreement, instigating a new, more flexible period in the global currency market known as ‘Bretton Woods II.’”
Zoellick’s mere mention of the possibility sent gold prices to $1,402.80 an ounce in New York trading for the first time ever.
In spite of the market response, the idea attracted some pretty sharp criticism. Differing on the very premise that markets already use gold as a kind of alternative currency, Berkeley economist J. Robert DeLong cracked that Zoellick must be “the stupidest man alive.”
“Markets are using gold as a speculative asset and a hedge,” he wrote. “They are not using it is a medium of exchange, a unit of account, or a safe store of nominal value.
He also noted that attaching fiat currencies to gold would have a deflationary effect.