World Bank president Robert Zoellick has called on bickering G20 nations to bring gold back into the global monetary system as an anchor to guide currency movements.
Ahead of a G20 summit this week in Seoul, Zoellick said an updated gold standard could help retool the world economy at a time of serious tensions over currencies and US monetary policy.
He said the world needed a new regime to succeed the “Bretton Woods II” system of floating currencies, which has been in place since the fixed-rate currency system linked to gold broke down in 1971.
The new system “is likely to need to involve the dollar, the euro, the yen, the pound and a renminbi [yuan] that moves towards internationalisation and then an open capital account,” he wrote in the Financial Times yesterday.
“The system should also consider employing gold as an international reference point of market expectations about inflation, deflation and future currency values,” Zoellick said in a commentary piece.
“Although textbooks may view gold as the old money, markets are using gold as an alternative monetary asset today,” he wrote.
The original Bretton Woods agreement laid out a US-led framework for stability in the world financial system after World War II, with the dollar pegged to gold and controls in place to limit the flow of capital.
The gold standard is believed to help guard against inflation, but does not allow for the flexible monetary policy that many economists believe is essential in counteracting economic shocks.
It was abandoned by US president Richard Nixon in 1971 as the dollar’s value plummeted relative to gold. Today, gold prices are again riding as investors seek a timeless hedge against the risks of inflation and US indebtedness.
Zoellick acknowledged that forging a new monetary agreement to govern the world economy would take time, two years after the West’s worst financial crisis since the 1930s.
“But we need to begin,” he wrote.
The World Bank chief’s comments came amid worries of a new “currency war,” when countries jostle for trade advantage by massaging their exchange rates lower.
The US has led accusations that China cheats in world trade by artificially weakening its currency.
However, Washington also stands accused of tolerating a weak dollar, roiling emerging markets whose own currencies are rising strongly, hurting their export competitiveness. The complaints have intensified since the US Federal Reserve last week announced a US$600 billion shot of monetary stimulus — in effect printing money that other economies worry will flood their markets.
Zoellick also called on the G20, whose leaders meet in the South Korean capital on Thursday and Friday, to forge structural reforms, including more domestic demand in China and more debt-reduction in the US.
Major economies “should agree to forgo currency intervention, except in rare circumstances agreed to by others,” he added.
The G20 could work out tools to help emerging economies cope with the kinds of hot-money flows that are now driving up their currencies and creating fears of asset bubbles.
The G20 should also “support growth by focusing on supply-side bottlenecks in developing countries,” such as infrastructure, agriculture and a lack of skilled labor, Zoellick said.
“Perhaps most importantly, this package could get governments ahead of problems instead of reacting to economic, political and social storms,” the World Bank president said.
He said the G20 faced a choice between “drive or drift.”
“How the G20 decides could determine whether multilateral cooperation can achieve a strong economic recovery,” Zoellick said.
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