The True Gold Standard (Second Edition)
Restoring gold's role in currency markets should be at the top of the G-20's agenda.
A funny thing happened on the way to the G-20 meeting in Seoul, South Korea, this week: The world's growing dissatisfaction with U.S. policy toward the dollar has derailed the Obama administration's proposal to elevate trade balances as the reference point for currency values. Instead of asserting America's traditional leadership role, President Barack Obama is confronting calls to replace the U.S.--and the dollar--as the center of the international monetary system.
The no-confidence vote led by China, Japan and Germany and supported by Brazil is the direct consequence of the Obama administration's embrace of a Nixonian, weak-dollar policy as it struggles to resuscitate the U.S. economy. Blaming the Chinese renminbi-dollar exchange rate for high U.S. unemployment is eerily similar to the claims made by President Richard Nixon when, in 1971, he promised that suspending dollar/gold convertibility and an 8.5% devaluation of the dollar would make American labor more competitive.
Like President Nixon, Treasury Secretary Timothy Geithner claims that the U.S. supports a strong dollar. But just as in the early 1970s, the U.S. is unabashedly following an easy-money policy at home while letting the dollar fall on international currency markets.
With the world's monetary system tethered to the dollar, this mix of U.S. policies led to the great, global inflation of the 1970s. No wonder the scramble is on to find a permanent replacement for the dollar.
The surprising answer may turn out to be a gold standard designed to reflect the realities of a 21st-century global economy.
World Bank President Robert Zoellick, writing in last Sunday's Financial Times, broke a sound barrier among the leadership of the Group of Eight industrial countries with regards to restoring gold to a central role in a new, international monetary system. Such a system, he wrote, "is likely to need to involve the dollar, the euro, the yen, the pound and the renminbi. ... The 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."
Columnist Michael Kinsley is looking exceptionally prescient. Last May, in an article titled, "My Nightmare" in The Atlantic Monthly, he asked "Am I crazy or is the commentariat ignoring our biggest economic threat?" Kinsley's piece in The Atlantic Monthly anticipated a flood of articles in the world press exemplified by this UK Telegraph July 20 headline: “Gold reclaims its currency status as the global system unravels.” The evidence of the shift in the elite opinion stream is clear: the gold standard is returning to respectability.
Just 5 months later, the dollar is in a relentless decline, falling below $1,300/oz of gold, sinking against the Euro, hitting a record low against the Swiss franc. For those of us who lived through the Nixon/Ford/Carter inflation of the 70s, this sure looks like a precursor, a dramatic one. Kinsley may be playing Cassandra here. It wouldn’t be the first time for him. Kinsley pondering gold:
Kinsley: The only reason to buy gold is fear that the currency may collapse. Paper currency used to represent claims on a share of the gold in Fort Knox. Now it is just “fiat money,” backed only by the “full faith and credit” of the United States government.
Kinsley’s voice changes the public conversation. Until recently, there were three main critiques of gold, all relying more upon ridicule than reason:
A future of stable currency values.
French economist Jacques Rueff once said "Tomorrow, to save man, we will give him a real currency." For a world that has suffered nearly 40 years of economy-retarding currency instability, that tomorrow is very near.