Ahead of the G20 meeting in Seoul on 11 and 12 November 2010, there has been much debate about exchange rates and the dangers of currency and trade wars. This debate has heated up since the Federal Reserve Bank announced that it was embarking on a second round of quantitative easing: a policy likely to drive down the exchange rate of the US dollar.
Writing in the Financial Times, Robert Zoellick, president of the World Bank, argues that co-ordinated global action needs to be taken to promote economic growth and stability. Amongst other things, this should include using gold as an ‘international reference point’.
“… the 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.”
Would this be a return to the adjustable peg system designed at Bretton Woods in 1944 – a system that collapsed in the early 1970s? Zoellick thinks that the world should begin moving back to some sort of Bretton Woods system, with gold as the anchor against which currencies are pegged. Critics argue that this could be dangerously deflationary as the supply of gold is not something that can easily be increased. Read the articles below and consider whether such a move would be a good idea.
Zoellick seeks gold standard debate Financial Times, Alan Beattie (7/11/10)
The G20 must look beyond Bretton Woods Financial Times, Robert Zoellick (7/11/10)
World Bank chief calls for gold to anchor forex AFP on Google hosted news (8/11/10)
In Which Bob Zoellick Makes His Play for the Stupidest Man Alive Crown Grasping Reality with Both Hands blog, J Bradford DeLong (8/11/10)
Return to the Gold Standard would be madness Telegraph, Edmund Conway, (8/11/10)
There is room for debate on a gold standard Financial Times, James Mackintosh (8/11/10)
Private sector should lead gold standard adoption Reuters blogs, Martin Hutchinson (8/11/10)
- How did the Bretton Woods system work to correct balance of payments disequilibria?
- What was the role of (a) gold and (b) the dollar under the Bretton Woods system?
- If countries adopted a pegged exchange rate, what implications would this have for their monetary policy?
- Would using gold as a world currency, to which other currencies were pegged, inevitably have a deflationary effect on the world economy?
- To what extent is gold currently used as a world currency?
- What other measures could the G20 countries adopt to create greater exchange rate stability between the major currencies?
- What is the case for the private sector to start using gold in ordinary transactions?