Robert Zoellick put a few sentences about gold toward the end of a column in today’s FT that are drawing a lot of attention. I doubt very much if the World Bank President has in mind a return to the gold standard, but goldbugs and critics alike are talking as if he does.
Even if one placed overwhelming weight on the objective of price stability — enough weight to contemplate a rigid straightjacket for monetary policy — gold would not be a suitable anchor. The economy would be hostage to the vagaries of the world gold market, as it was in the 19th century: suffering inflation during periods of gold discoveries and deflation during periods of gold drought. This is well-known. I am confident Zoellick understands it. (He and I were in the same macroeconomics seminar at Swarthmore College in the 1970s.)
I think he is making another point. The world is moving away from a monetary system in which the dollar is the overwhelmingly dominant international reserve asset. The dollar’s share of international reserves has been declining ever since Richard Nixon unilaterally ended the Bretton Woods system in 1971. The dollar’s unique role is not an eternal god-given constant of the universe, any more than it was for pound sterling. The US currency of course replaced the pound in the first half of the 20th century, with a lag of 25 years or more after the US surpassed the UK economically.
Will some asset replace the dollar, then? No, not a single asset. But we are probably moving to a system where there will be as many as a half dozen international reserve assets. First, there is the euro. Despite the serious troubles facing it this year, the euro has been a competitor for the dollar since it came into being 11 years ago. Both the yen and the Swiss franc have to some extent played safe haven roles during the last three years of global financial turmoil. The pound is not out completely. Some day the renminbi will be added to the roster of major international currencies, when China’s financial markets are sufficiently developed and open. Even the SDR (special drawing right) came back from the dead in 2009.
And, yes, gold too has re-joined the world monetary system. Gold was seen as an anachronism as recently as a couple of years ago. The world’s central banks had been gradually selling off their stocks. But all that changed in 2009. The People’s Bank of China, the Reserve Bank of India and other central banks in Asia have bought gold. Understandably, they want to diversify their reserves. It appears that central banks have stopped selling gold even among advanced countries and that aggregate gold reserves have risen over the last year. This is a multiple reserve asset system.