Robert Zoellick, President of the World Bank, has raised a furore. He has called for nothing less than the return of the gold standard, and economists and analysts from New York to Tokyo, via Timbuktu and everywhere else you can think of, have something to say on the matter. But how it is being portrayed is not the reality. Yes, it is literally true to say that Mr Zoellick wants “nothing less than return of the gold standard,” but he also wants to see a good deal more than that too, and that’s what makes his idea so interesting.

Mr Zoellick used the FT to explain his idea, and said he wants to “consider employing gold as an international reference point of market expectations about inflation, deflation and future currency values.” See FT: Zoellick seeks gold standard debate

http://www.ft.com/cms/s/0/eda8f512-eaae-11df-b28d-00144feab49a.html#axzz14lj9yucD

Now, there is much that is wrong with a gold standard, although there are no shortages of views expressed across the blogosphere speaking up for it.

Churchill adopted a gold standard for Britain when he was chancellor, and his move is widely regarded as his biggest mistake. Keynes was one of his main advisers, and strongly cautioned him against the move, but Keynes was ignored then, just as he was several years later in 1944 at Bretton Woods. Keynes was right on both occasions. See: IMF, G20 and treaty to end the currency war.

But for thousands of years, the gold standard had been the only way of measuring money. And it just so happened that during those thousands of years, economic growth hardly ever happened.

It makes no sense to tie the money supply to a substantive whose availability is unrelated to potential capacity; whose availability is unaffected by innovation. It may have taken the discovery of gold in the New World to boost the global money supply, in order for the Industrial Revolution to get under way.
So, if Mr Zoellick was calling for a return of the gold standard, he would be wrong. It is just that he is doing no such thing.

Rather, Mr Zoellick wants to see a new international currency made up of the dollar, the euro, the Chinese yuan and the good old pound. Mr Zoellick wants to see gold play a role in this currency.

Mr Zoellick is right to want a new international currency, and he has a big ally in China which has made similar recommendations on numerous occasions.

He may be wrong, however, to have gold form a part of the mix.

But it would be a mistake to focus too much on Zoellick’s gold suggestion. His recommendation was broader than that. In the great debate among world leaders, the Zoellick plan is important. But then again, another idea is more important still, and to find out more, see: IMF, G20 and treaty to end the currency war.

PS It has been asked, if the euro was broken up, how would we
measure assets currently measured in euros. The simple answer: if there was a new international currency, it would be measured in this medium.

PPS Currently the IMF has a system it calls special drawing rights. It is made up of the dollar (44 per cent), the euro (34 per cent), the yen (11 per cent) and the pound (11 per cent). The beauty of such a system is that each individual currency can still trade freely.

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