Back to the Gold Standard?

Perhaps you were shocked to see news that the Chairman of the Federal Reserve wants the world to consider gold as money again - or something like that.

By contrast, I was quite pleased, as I have been speaking at conferences for some seven years on the need to move currencies back to something more solid than the say-so of governments and central banks. Usually, in order to make my point, I have naturally had to point to the US government's de-linking of gold from the dollar as one root of our current global problems. This has been taken to mean that I am argue for a return to the gold standard. I do not. But a return to the gold standard would certainly be better than the current system where a government or central bank can just print as much money as it likes.

That ability to print as much money as a government wishes, along with the ability to set interest rates (and lesser-used techniques), is supposed to be a key part of the array of "modern monetary policy tools" – and, in the circles that matter, there is widespread skepticism regarding whether anything other than the current system (with tweaks) is realistic, including Zoellick's suggestions.

However, everyone knows and agrees even in public that the current system is not working. The printing of excessive amounts of money since the 1970s by all governments is another root of our global problems.

So the challenges are: How to limit governments, so that they print only an appropriate amount of money? And what is "appropriate"?

For the first: no government can be compelled to do anything except by extreme military force and that is not a favoured "policy tool" at present.

So the only option is to agree that countries and governments which do not abide by whatever international rules are agreed, should barred from trading in the international markets (i.e. those regulated through the World Trade Organization). That would admittedly entail a political process. But, sooner or later, as has become evident in the case of the contretemps over Chinese government policies to keep the Remnimbi artificially low, countries do start applying pressure. The problem is that the only sorts of pressure that they can apply at present are the sorts of pressure they have been applying. Those have not proven very effective so far, because there is no actual sanction available. But if an agree framework for currencies could be part of the World Trade Agreement, we would immediately have a relatively powerful sanction against recalcitrant governments.

That leaves the question of what an "appropriate" framework would be which might enable at least some minimum flexibility to governments/ central banks (so that they can still enable and steer growth) which providing some limits to the unrestrained printing of money.

One possibility is to use gold as the measure of how much money a country can print: the more gold you have, the more money you can print. Silver or platinum or silica (or a basket of such resources) might be another option. The availability of energy could be yet another option, perhaps with double points for non-fossil fuels. Each of these options have the problems associated with the quantity of the resources available (for example, in the case of gold, a sudden discovery of more gold in some country would immediately alter things!).

Now, we must distinguish between a gold "standard" (printing only as many "tokens" or IOUs as you can honour on the basis of the gold actually sitting in your vault) and the new Zoellick proposal which suggests that gold should be merely "an" indicator to help set foreign exchange rates, employing gold as merely "a" reference point for international expectations about inflation, deflation and so on. While Zoellick's system might well accomplish the welcome task of taking us away from the current preoccupation with simply devaluing currencies (the "currency wars") and therefore further away from the threat of protectionism and actual wars, his system is still a house built on sand. If gold is to be "an" indicator, what else will his system consist of? Nothing more than either a basket of currencies - or what the Chinese indicated several months ago: the IMF's Special Drawing Rights, which are themselves based on contributions by different countries of their own currencies.

So what's wrong with that? Simply that, if one rotten apple infects a whole cartload, what we have on hand are several rotten apples from around the world starting with the Remnimbi and ending with the dollar - and with almost everything in between: every country has been printing too much money. We could almost say that we have nothing but rotten apples, though there is a difference between the rottenness of say the dollar on one hand, whose rottenness can be inspected by anyone (including the Chinese), and the rottenness of the Remnimbi on the other, whose rottenness can be inspected by no one (including those Chinese who are outside the relevant small closed inner circle).

However, I must say that the Zoellick proposal is better than the Chinese proposal because it adds one element of solidity (gold) – even if only in terms of the varying value of its price, rather than actual gold, which is of course much more solid.

All that leaves us no wiser about the question: how much money should governments be allowed to print if they want to belong to the world trading system?

Well, let's go back to the beginning (always a very good place to start!). Money is (among other things) a medium of exchange, and that medium needs to be reliable – just as a yard or a meter is a measure of distance and needs to be reliable, rather than simply manipulated to suit.

In order to have a reliable medium of exchange, if one does not want to "go back" to a metal-based standard, it is surely logical to allow and indeed to force countries to print only as much of this medium of exchange as makes sense. What makes sense? That's simple: you cannot exchange more than you produce!

So here's my proposal: countries should be allowed to print each year, as much money as the worth of the total value of their goods and services the previous year.

It is difficult for us to be able to assess that accurately, but we have good methods of getting a rough estimation of that, and a three- or five-year rolling average could be as accurate as necessary.

Naturally, if you are an economist or politician, you can always find grounds to dispute what the "real value" might be of a country's goods and services. But, with my proposal, you would be at least within shouting distance of reality, rather in the sort of dream (or nightmare) world in which we are today. Sphere: Related Content