Back on Gold?

I don’t know what World Bank President Robert Zoellick is suggesting exactly with his mention of the G-Word this weekend in the Financial Times,

[T]he G20 should complement this growth recovery programme with a plan to build a co-operative monetary system that reflects emerging economic conditions. This new system is likely to need to involve the dollar, the euro, the yen, the pound and a renminbi that moves towards internationalisation and then an open capital account.

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.

The development of a monetary system to succeed “Bretton Woods II”, launched in 1971, will take time. But we need to begin. The scope of the changes since 1971 certainly matches those between 1945 and 1971 that prompted the shift from Bretton Woods I to II. Serious work should include possible changes in International Monetary Fund rules to review capital as well as current account policies, and connect IMF monetary assessments with WTO obligations not to use currency policies to remove trade concessions.

As Mish notes, “the current dollar-based global monetary system known as ‘Bretton Woods II’ is on its last legs” -- and its collapse wouldn’t just bring down dollar hegemony but the whole kit and caboodle of Bretton Woods global institutions, including Zoellick’s employer. My guess is that, mostly, Zoellick is gesturing towards gold to give Washington’s creditors a warm feeling of timeless stability after Bernanke’s latest “QE” announcement.

Even if Zoellick & Co. were able to pull off some kind of international reserve-currency basket that included precious metals, it would quickly fall apart for the same reason that Bretton Woods I did. In his article, Zoelick makes it sound like monetary policy changes because the world agrees that a new system is needed to address new economic and technological developments.  It’s actually much simpler and more squalid. “Bretton Wood I” -- a system of fixed exchange rates in which the U.S. promised to convert dollars to gold internationally -- broke down because Washington and the Fed printed too much money and the world banks began itching to dump their dollar reserves in favor of the yellow metal.  Nixon reneged on the U.S.’s promises of gold conversion and blamed it on “speculators.”

Now, just imagine the kind of “QE” that would go on if international banking bureaucrats and internal bankers (who are the same people) could team up on a new “stable” world currency.