Issue of the week: Bring back the gold standard?

last updated 8 January 2015

If Robert Zoellick wanted to “stir the waters ahead of the G-20 summit” this week, he got his wish, said Agustino Fontevecchia in Forbes.com. Writing last week in the Financial Times, Zoellick, the president of the World Bank, recommended several actions to end the international feuding over currency values—a major focus of the G-20. His final suggestion was a shocker: a proposal that gold be used as “an international reference point” for currency values. To many ears, it sounded as if he were urging a return to the “gold standard” that governed exchange rates until 1971. Back then, “several countries pegged their exchange rates to the U.S. dollar, which in turn was fixed to the price of gold at $35 an ounce,” said Claudia Assis and Ashley Lau in Marketwatch.com. The result was “a system that implicitly pegged currencies to gold.” After that system collapsed, exchange rates were “allowed to float,” and almost immediately, nations started accusing one another of artificially cheapening their currencies to boost exports. Could a return to the gold standard end such flare-ups?

Not a chance, said Martin Wolf in the Financial Times. Granted, if all currencies were linked to the price of gold, “the value of money would apparently be free from manipulation by the government.” But the hurdles to re-implementing the gold standard would be insurmountable, and any supposed stability would be illusory. The tallest hurdle is “the mismatch between the value of official gold holdings and the size of the monetary system.” The world’s central banks hold about $1.3 trillion in gold. They’d need roughly 10 times that amount to credibly back the world’s $61 trillion in bank deposits. So central banks would have to buy masses of privately held gold, sending the metal’s value soaring and handing a few speculators a windfall. More troublesome, “gold reserves are distributed quite erratically around the world.” As countries bought or sold gold to adjust to the new system, “some currencies would have to experience inflation and others severe deflation.” So much for stability.

Well, we sure don’t have stability now, said The Wall Street Journal in an editorial. In any case, Zoellick isn’t calling for “a return to a full-fledged gold standard.” He’s merely suggesting that an international currency regime “needs a North Star to judge when it is running off course.” Gold can serve that purpose because its price reflects inflationary expectations—witness its current price of more than $1,400 an ounce, which tells you where the markets think inflation is headed. (Hint: way up.) If currencies guided by the price of gold can blunt “the frequent and sharp movements in exchange rates” that distort trade, misallocate capital, and cause tensions even among allies, the idea is worth considering.