Could The World Go Back To Gold Standard

Could the world go back to the gold standard? | Martin Wolf's Exchange: ... http://blogs.ft.com/martin-wolf-exchange/2010/11/01/could-the-world-go...
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Could the world go back to the gold standard?

November 1, 2010 11:41am |
Update: This post was written before Robert Zoellick, World Bank president, argued that leading economies should
consider readopting a modified global gold standard to guide currency movements.
During any period of monetary disorder — the 1970s, for example, or today — a host of people calls for a return to the gold
standard. This is not the only free-market response to the current system of fiat (or government-made) money. Other
proposals are for privatising the creation of money altogether. (See, on this, Leland Yeager, professor emeritus at the
University of Virginia and Auburn University, in the latest issue of the Cato Journal.) But the gold standard is the classic
alternative to fiat money.
It is not hard to understand the attractions of a gold standard. Money is a social convention. The advantage of a link to gold
(or some other commodity) is that the value of money would apparently be free from manipulation by the government. The
aim, then, would be to “de-politicise” money.
The argument in favour of doing so is that in the long-run governments will always abuse the right to create money at will.
Historical experience suggests that this is indeed the case.
So why choose gold? It is, after all, an impossibly inconvenient means of exchange. But gold has a lengthy history as a
widely-accepted store of value. If one is looking to reinstate a pre-modern monetary, gold is the obvious place to start.
After the experience of the last three decades the monetarism of Milton Friedman is no longer a credible alternative. It was
abandoned for two simple reasons: first, it proved impossible for monetarists to agree on what money is; and, second, the
relation between any given monetary aggregate and nominal income proved unstable.
Again, recent experience suggests that we can no longer be so confident that delegation to independent central banks
protects against severe monetary instability. That system permitted a gigantic increase in credit, relative to gross domestic
product. It is equally clear that governments do not wish to see this edifice collapse, for understandable reasons. This being
so, the ultimate solution may be to increase nominal incomes, via inflation. Indeed, several economists recommend this. If
that did happen, it would support those who argue for abandonment of the modern experiment with fiat money.
So would the gold standard be the answer? We would need to start by asking what a return to the “gold standard” might
mean.
The most limited reform would be for the central bank to adjust interest rates in light of the gold price. But that would just
be a form of price-level targeting. I can see no reason why one would want to target the gold price, rather than the price of
goods and services, in aggregate.
The opposite extreme would be a move back into a world of metallic currency. But money in circulation will continue to be
predominantly electronic, with a small quantity of paper, as today. That is the only convenient way to run a modern
economy.
Finally, a return to the Bretton Woods system, in which the US promised to convert dollars into gold, at a fixed price, but
only for other governments, would lack any credibility, since there would then be no direct link between gold stocks and the
domestic money supply.
With these possibilities eliminated, the obvious form of a contemporary gold standard would be a direct link between base
money and gold. Base money — the note issue, plus reserves of commercial banks at the central bank (if any such institution
survives) — would be 100 per cent gold-backed. The central bank would then become a currency board in gold, with the unit
of account (the dollar, say) defined in terms of a given weight of gold.
1 of 16 11/9/2010 2:10 AM
In a less rigid version of such a system, the central bank might keep an excess gold reserve, which would allow it to act as
lender of last resort to the financial system in times of crisis. That is how the Bank of England behaved during the 19th
century, as explained by Walter Bagehot in his classic book, Lombard Street.
So what would be the objections to such a system? There are three: difficulties with the transition; instability; and lack of
credibility.
The biggest transition problem is the mismatch between the value of official gold holdings and the size of the monetary
system. The value of gold held by central banks is apparently about $1,300bn, while global deposits of the banking system
were about $61,000bn in 2008, according to the McKinsey Global Institute. To survive the slightest financial panic, the ratio
of gold to bank money would need to be perhaps an order of magnitude higher.
One obvious objection is that this would generate huge windfall gains to holders of gold. More important, if policymakers set
this initial price wrong, as they certainly would, they could unleash either deflation or inflation: the latter is far more likely,
in fact, because private holders would start selling their gold to the central banks at such a high price. Apparently, about 90
per cent of gold is now privately held. So the expansion in the monetary base could be enormous.
Moreover, gold reserves are distributed quite erratically around the world. So some currencies would have to experience
inflation and others severe deflation. A similar problem explains why it was impossible to recreate the gold standard after
the First World War: too much of the world’s gold reserves were then held by the US.
What, then, about the problems of the steady state? One obvious point is that we would be back to the world in which the
balance of payments would be settled by physical shipment of gold or, as it was later, by movements within central bank
vaults. That would, at the least, be absurd.
A far more important problem is that of financial stability. Economists of the Austrian school wish to abolish fractional
reserve banking. But we know that this is a natural consequence of market forces. It is wasteful to hold a 100 per cent
reserve in a bank, if depositors do not need their money almost all of the time. Banks have a strong incentive to lend some of
the money deposited with them, so expanding the aggregate supply of money and credit.
The government might seek to impose narrow banking: banks would have to back any deposits with notes or reserves at the
central bank. But entrepreneurs could then create quasi-banks (let us call them “shadow banks”). These would hold deposits
in the safe narrow banks and offer higher returns to customers, because they lend out surplus reserves for profit.
Such a system is unstable. In good times, credit, deposit money and the ratio of deposit money to the monetary base
expands. In bad times, this pyramid collapses. The result is financial crises, as happened repeatedly in the 19th century. To
prevent this one would have to move into the world of limited purpose banking recommended by Larry Kotlikoff, in which
no financial institution would be allowed to promise redemption at par unless it held matching assets.* If so, the pure gold
standard would require abandonment of the current banking system altogether.
A further danger is that the response to all shocks would have to come via nominal wage and price flexibility. A less obvious
point is that the gold standard does not guarantee price stability. Depending on the supply conditions for gold, the price
level might move up or down. In the long-run, however, the price level would probably tend to fall (because the supply of
gold fails to keep pace with global activity). Such a world of trend deflation is liable to depressions if or when the
equilibrium real rate of interest is less than the rate of deflation.
Another and, in my view, even more serious, threat to the stability of any gold standard regime is international. A peg to gold
may prove radically destabilising for any currency if other significant countries failed to sustain domestic monetary and
financial stability. There could then be floods of gold into or out of a currency that is well managed. The monetary and
financial consequences could be dramatic, with severe deflation one obvious threat. This is precisely what happened in the
interwar years, with the chaos emanating mainly from the US.
Finally, there is the fundamental problem of credibility - or rather lack of it. As Bennett McCallum of Carnegie Mellon
University also notes in the Cato Journal, the forces that now demand inflation from time-to-time would demand a change
in the gold weight of the currency as happened in the 1930s. “Historically”, he notes, “the gold standard provided a
reasonable degree of price level stability over long spans of time because the population at large had at that time a
semi-religious belief that the price of gold should not be varied but should be maintained ‘forever’.”
2 of 16 11/9/2010 2:10 AM
That faith has perished. Moreover, everybody knows it has perished. So whenever the economy was in difficulty, the only
question would be how soon the gold price would be changed or the link abandoned.
In short, we cannot and will not go back to the gold standard. As L.P. Hartley wrote, “The past is a foreign country: they do
things differently there.” We cannot live in the 19th century. It is foolish to pretend that we can.
* Jimmy Stewart Is Dead: Ending the World’s Ongoing Financial Plague with Limited Purpose Banking (Wiley 2010)
Related material:
Gold can go a lot higher - FTfm video
What’s driving gold? - FT interactive graphic
Tags: Gold
November 1, 2010 11:41am in Central banks, Economics | 71 comments
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gareth davies | November 1 12:53pm | Permalink Report
Dear Martin
Nevermind the 19th Century what about the middle ages or the time of the conquistadors? We could have some wars to increase the money supply by sending
armies overseas to steal gold or ensure supply.
Oh like Oil today then!
Sounds like an article you wrote a while back.
devereux5000 | November 1 4:26pm | Permalink Report
Thank you for this Mr.Wolf. I got the link from Paul Mason of the BBC over at Facebook. This has stimulated me to start work on an experimental piece of literature
called "Money" which may take several years. Hopefully it won't turn out to be literary fold's gold.
My proposal for what I would do with the Nobel Prize for Literature is at the link below. I did a quick sum and discovered that I would give it away to 724 women to
even things up a bit.
http://wp.me/PZU3g-2E
Maybe Gillian Tett would be one of the recipients if she wanted it. Without her work I would not have done mine. In particular, her experience with Japanese and
Russian (two of my favourite languages) has been an inspiration.
Also, art is a super store in value in times of currency volatilty. This is part of why I am challenging Damien Hirst and Charles Saatchi to £1,000,000 chess matches
which, if they accept and I win, will go into microfinance funds for artists, chess players and people filling empty shops with small businesses along a similar model as
the Nobel-winning Grameen Bank in Bangladesh. If you contact me at devereux5000@gmail.com I can tell you all about those ideas.
Martin Wolf | November 1 7:26pm | Permalink Report
@ Gareth Davies, On the contrary, freshly minted. This is a very hot topic in certain circles. I am sure you will soon see that.
3 of 16 11/9/2010 2:10 AM
John Affleck | November 1 8:00pm | Permalink Report
Dear Martin, I had hoped, upon seeing the title, that you would write with tongue firmly in cheek. I don't think you did. In fact, it is extremely difficult, for this economist
at least, to understand the appeal of the gold standard. Make the money supply dependent on finding finding a yellow metal in the ground? Absurd. Equally absurd is
the notion that a gold standard kept governments from "debasing" their currencies -- it did not, as England during the Napoleonic wars or WWI can attest. I'll stick with
Milton Friedman's MV = PY, thank you. In the decades to come, the gold standard will join "the world is flat" and the "sun revolves around the earth" in the dustbin of
history.
But the worst part of this article is that now all the goldbug wackos can point to an article in the FT as evidence that this dangerously bad idea is somehow on the
table.
graeme_b | November 1 8:18pm | Permalink Report
Keynes suggested a currency backed by a basket of commodities. More specifically, how about a currency backed by energy reserves? (which, after all, are potential
work)
World energy use in 2008 was 474x10^12 joules, which works out at about 132000 billion kWh, so about 46 cents per kWh - sounds like this could be a very
reasonable basis for a currency to me.
Danny Barrs | November 1 9:20pm | Permalink Report
Does anyone really believe that the current problems are linked to a lack of a standard such as gold? Whatever "gold" standard was set, it would not alleviate real
estate fraud (state sponsored or not), derivative fraud, deliberate creation of other bubbles or ponzi schemes.
graeme_b | November 1 9:51pm | Permalink Report
Danny Barrs - yes and no. I think credit bubbles do occur, and are facilitated by making it easy to expand the money supply (i.e. credit). In a credit bubble, which
central bank monetary bailouts help create, more future work is promised than can be delivered. Real estate bubbles, derivatives etc. are just details in the creation of
a credit bubble. This isn't the full story though. The supply and demand for credit naturally increases when profits are loaned to consumers that are struggling to pay
for the necessities of life because their wages are incompatible with profits. The economist who first described this in detail is rather out of fashion, and I don't agree
with his suggested solution anyway. Economic cycles are just a fact of life. I like the idea of basing the money supply on energy supply because I believe either can
become limiting to economic activity, and this would discourage futile monetary tinkering. At the moment, it seems as though the consensus regards monetary policy
as a panacea, which it is not. Fiscal policy and taxation should be looked at again.
PS. my previous post should have said world energy use is 474x10^18 joules per annum; and 46 cents per kWh is based on the $61000 bn global bank deposits
Martin mentions in his article.
AK | November 1 10:13pm | Permalink Report
Mr. Wolf said,
>> This is a very hot topic in certain circles. I am sure you will soon see that.
It's a very convoluted solution to current circumstances. I guess it would be much easier to impeach and/or dismiss Mr. Bernanke IMHO.
A Nassim | November 1 10:17pm | Permalink Report
Whether we like it or not, we are going back into the future.
Resource wars are being tarted up as wars for democracy or some such nonsense. The great credit fraud is coming to its natural dénouement as it seems that banks
have been reusing the same property titles in different instrument. Of course, this has nothing to do with fractional reserve banking but it is the same idea applied,
imaginatively, in a different area.
I am not proposing any "solution" since there is none. However, I do keep a lot my savings in gold and silver and I respectfully suggest that you, Mr Wolf, do likewise.
Philip Copley | November 1 11:13pm | Permalink Report
Dear Goldfinger
Why can't you buy krunerands? They're made in south africa out of solid gold. Every one else gets them. The point is, if you want you can get. Also, you are free to
insist on payment in gold for all goods and services you provide. In this way, gold standard is coexistant with fiat moolah (string theory suggest several such
universes coexistant at once).
After all, goldfinger, we can not die in the 19th century. But if the popularity of fiat wanes while the lust for gold exceeds all inhibition, we enter a period similar to what
the the author of "roughing it" called the guilded age.
Carol Wilcox | November 1 11:33pm | Permalink Report
Sorry if this sounds naive, Martin, but I don't 'get' these two statements:
1. The advantage of a link to gold (or some other commodity) is that the value of money would apparently be free from manipulation by the government.
2. Other proposals are for privatising the creation of money altogether.
Surely what we have already is the privatisation of the creation of money. Private banks create money (i.e. credit) out of thin air. It would be better if credit creation
was under the control of governments, who could then collect all the seignorage as well.
But you appear to be talking about the creation of coins and notes which is a trivial proportion of money. Is this really important?
4 of 16 11/9/2010 2:10 AM
Alexandre Lucas | November 2 12:07am | Permalink Report
Dear Mr Wolf,
The gold standard is a proxy for fixing the quantity of money available in the economy and make it a given rather than a tool of economic policy. The simplest idea
behind it is to reduce the number of variables influencing the purchasing power of a unit of such currency over time. Take a unit of a currency the quantity of which is
fixed: the purchasing power of such a currency would, in 50 years, buy you a given portion of the output at that time; predicting the quantity of X or Y product you
would be able to buy is obviously not possible and will depend on the relative demand for these products between themselves, but at least you have eliminated the
direct impacts of decisions the democratic society might have taken to erode the value of what you have purchased.
A system based on a fixed quantum of money is the only guarantee that a contract between a person and society (which ultimately guarantees the value of the
medium of exchange money is) is going to be honoured by all parties. Such a system would have numerous advantages, the most important of all being to give
money and time their true value: in such a system,
- one would only be able to invest if someone else refuses to consume on the contrary of today where people live in a wonderland where money is "created" when it
doesn’t exist to allow for economic growth through investment (by "created" understand that the government/central bank decided to give part of society's output in a
given year to someone else in exchange of a promise of being reimbursed at a future date),
- one would never see the absurdity of being able to get a 95% LTV loan priced at 4.50% fixed rate over 30 years which allows the borrower to walk away if things go
wrong; on price of U.S. mortgages, I have always asked people around me the following question : assume a company is worth 100 on the stock market and has an
EBITDA of 10; would you lend such a company 95 over 25 years with the ability to seize its business if it doesn’t pay and if yes, at what rate? Answer was "No,
because it would be able to repay the average cost of debt I would charge for it!"; this is only the result of the current monetary excesses - ask such a question to
anyone on the street and everyone will say they would not lend their own money on these terms and, yet, by some mysterious agency problem, our banks are doing
so...
- pension funds will not be forced to invest in assets yielding 1% FCF yields ad vitam aeternam due to a lack of alternatives thus creating asset bubbles and
rendering them unable to ensure the pensioners will be paid what they have been (over) promised in terms of retirement packages,
- money would be a perfect value carrier in time as the buying power of such a currency in time would only be influenced (all things being equal) by a rise in
productivity, people would start talking about "nominal" vs "real" GDP...
BUT, and this is the key issue of the gold standard - people will be faced with their anthropologic inability to honour their own word. Denial is the key driver of the
current crisis (not the banks crisis, but the inability of our societies to accept a long term decrease in living standards of those who overspent in the past decade)
- refusal to admit our societies are obsessed with economic growth as an end in itself which result in current massive stimulus packages etc...,
- refusal to admit that consuming more than one produces can only be done for a certain time and only at the expense of others,
- general denial of promises made in the past (in particular to repay loans for property but above all the promise to repay in the future today's consumption)
The gold standard is too difficult for us mere humans. It would prevent our societies to "regenerate" themselves after traumatic experiences such as the current crisis
through a levelling of all debts with the ground, through a "tabula rasa" and widely spread amnesia affecting all debts, through an inflationary asset bubbles orgy
never seen before...
Paradoxically, the golden standard belong to a different age, one where people believed reason and progress have created a world where in a linear way our future
will be better than our past, where men would escape the millennial rhythm of traditional societies where time was circular - accumulate wealth in the summer in
harvests and spend it all during orgies at winter. The gold standard ensured men would be true to themselves but those who founded it in England at the beginning of
the 19th century forgot that men are not gentlemen.
Best,
Alex
Andrew Davison | November 2 12:29am | Permalink Report
Thought Martin's article provides an excellent review of the problems inherent in returning to the gold standard. I cant see that it offers any comfort to "goldbug
wackos" that the idea is "somehow on the table", as suggested by John Affleck. And it is hardly "absurd" to "make the money supply dependent on finding a yellow
metal in the ground", given that such a system prevailed for long periods in history. But history also shows that the gold standard turned out to be highly problematic,
for the reasons which are highlighted in Martin's essay. Unless those problems can be overcome, then I agree with Martin that a return to the gold standard is not a
viable option.
Philip Copley | November 2 12:32am | Permalink Report
@Carol Wilcox
Not at all.
You ask a loaded question. First of all this:
1. Government can not manipulate by way of alchemy. Government is adept at creating fiat. Creating is epitome of manipulation.
But you introduce a broader question of whether it is advantageous for government NOT to manipulate the value of money. I think that money is so omnipresent that
your question is really whether or not government should manipulate anything at all, or, going further, should government exist at all? Is government advantageous?
2. Privatization of moola? Yes. But before you put the likeness of your face on a coin, make sure the coin has a high gold content. Other wise it might be shunned.
Adrian Vichie | November 2 12:57am | Permalink Report
If you want a view of what is being considered read the IMP paper; "Reserve Accumulation and International Monetary Stability: Supplementary Information" dater
13th April 2010, but was only released much later at a G20 in Canada. In the paper they talk about the gold standard, but a full read shows that it's not being
considered. What was discussed at the G20 was not released as far as I can find.
Central Banks are now becoming net buyers of gold after many years as net sellers, and as the WGC, and LBMA don't fully disclose holdings or sales who know
what the real holding are or what Central Banks are planning given how chaotic the world economy is at this time.
5 of 16 11/9/2010 2:10 AM
The Slog | November 2 7:43am | Permalink Report
'the pure gold standard would require abandonment of the current banking system altogether'.
That works for me.
The re-establishment of a 'standard' of some kind - ie, one that overrode a ridiculous situation in which gambling on currencies is more valuable than their economic
performance - would be an excellent thing. Yes of course it would be difficult and inconvenient....for the jerks engaged in stress-free currency manipulation. But prices
much greater than this one will have to be paid before we're finished.
Whatever form it takes, the world's methods of raising finance for genuinely contributory capitalist risk business need some form of ASBO.
http://nbyslog.blo...d-debtors-are.html
Åge Olav Mariussen | November 2 7:58am | Permalink Report
Dear Martin
You have good arguments showing why gold could not be reintroduced in a planned and orderly way. There is one scenario where gold could be reintroduced: a
situation of chaos and panic. If the nice stability of global money markets we have enjoyed for some time now shifts to unstability, say, as a result of a collapsing
global faith in the US dollar, surely, at least some central banks could start collecting more gold? The interesting question is: what does it take to offset the current
stability?
karenhelveg | November 2 8:33am | Permalink Report
Good speculation and revival of monetary history. But the world abandoned the official gold exchange standard for a reason and one is entitled to hold the view that
(capitalist) history is irreversible. Why was it abandoned? Because it was a strain on the system that had already developed beyond a nation-trade based system.
Capital movements did that. Money had already become a financial asset. That people hoard gold as a store of value (and still do) corresponds to the fact that money
in its origin of course is private. It was the debasing of gold etc. plus government debt taking that led to official money, the government putting a stamp on it.
But, with respect to the gold standard reintroduction: 1) in the first place it is impossible as can be seen from the latest G20 discussions where agreement on the
simplest things cannot be reached, 2) money is created through financial intermediation and accumulation not through 'government fiat' (this is the faulty monetarist
creed) although of course there is monetary, i.e. interest-rate influencing central-bank policies and so were there in the days of the classical gold standard, 3) gold
was latest used to clear international balances - and even that an illusion because it did not happen even in Bretton Woods days - between countries, but 4) the
problem is that the whole idea of national money is the illusion, money should be and is to some extent already, international in a globalized economy where four -
five currencies play off each other, 5) of course it would vitiate Ben Bernanke's and his predecessor's easy quantitative easing policies to reduce interest rates and
try to keep the American economy afloat while sending it further on its path of deindustrialization etc. if it has any effect at all, 6) gold is still an asset in private and
public keeps, its value does not need international agreements and this value is probably still benchmarking other commodities. But 7) there will be no turning back to
the gold standard unless worse things happen to the world than we have seen recently. Otherwise 8) the renminbi is getting ready to take over the dollar's role.
Åge Olav Mariussen | November 2 8:46am | Permalink Report
Karenhelveg has several good point, but is wrong in one respect. History always repeats itself, first as a tragedy, then as a farce (at least according to Marx). So
what could possibly be the farce which led to the reintroduction of the gold standard? A tea party in the White House? QE101?
Nick Antill | November 2 10:04am | Permalink Report
I think that there are two arguments in the article. One is about the inappropriateness of any return to the gold standard and how it never prevented financial crises in
the 19th Century, which I am sure is all correct. The other is about how to maintain financial stability, or at least reduce financial instability. My sense is that
separation of retail from investment banking would not prevent the former end of the industry from creating systemic risks, so the only possible remedy is to impose
larger capital requirements on all financial institutions, and to subject them to regular stress tests. But that certainly does not require the abolition of fractional reserve
banking.
stockburger | November 2 11:16am | Permalink Report
The main problem with a gold standard would be, that economic growth needs also agrowth in money supply. It would be a problem to grow the stocks of gold
enough to accomodate the econmoic growth which is needed and possible, especially in emerging economies. The result in connection with a gold standard would
probabely deflation, which in itself slows growth down.
But an international currency tied to a basket of different commodities could solve that problem
Ian Campbell | November 2 11:46am | Permalink Report
There can surely be little need to revert to a system that long ago proved itself in incapable of meeting the needs of the modern economy, for all the reasons given
and more. The need is less for new currency, banking and finance systems, for which the gold standard is being touted as a universal medicine that would treat all
three, than more for one that prevents bubbles from becoming extended. Memories are obviously short when applied in the collective.
The reason it is to the fore is because we clearly have central bankers, encouraged by inept and ill-educated statesmanship in the leading states and international
bodies across the globe, encouraged by many economists, who, knowingly or not, are intent on destroying the credibility of fiat currencies and so much more along
with them.
No wonder calls for a return to the gold standard are becoming siren, but it is yet an example of those who correctly recognise the depth of dificulties the 2011/12
world economy is going to be in, but who along with those central bankers,politicians and economists who misdiagnose a symptom as a solution.
Until there is a known, adequate, minimum safe rate of return that capital can safely achieve there will be no economic stability. That means abandoning ZIRP as the
solution to the problems of the post-meltdown environment, much as it was a necessary short-term measure for the afflictions of 2008/09. As a long-term measure it is
a disaster for the accumulation of capital and its planned investment. And, as everyone seems to be forgetting, the crisis was caused by a debt crisis. So a solution
that ignores this is not going to succeed. The gold standard is a sideshow idea in this.
Anthony J Peter | November 2 11:53am | Permalink Report
Well, to be quite honest I don't bother what governments or Feds think, also for that matter many economists (they largely now have a shameful track record,
excepting Roubinni, you Martin and a rare few more). I'll just hold my gold and watch how the living lie continues, especially in the US.
6 of 16 11/9/2010 2:10 AM
Mr. Wolf and commentators here are missing the main point why this issue is on the table again and why it is even considered by "Serious People" (in Krugman's
terminology).
One point (I guess) is concern by Arab countries what happened with their wealth. And they can refuse to sell oil in dollars since oil (or gold) is much better
preservation of wealth currently than USD.
But this is a tactical issue. Another issue is of strategic importance.
Why does the US government devalue the USD? -- Since it wants to spur an economic growth. But economic growth is delivered through actions of private
participants who engage in economic activities. And they engage there not for altruistic purposes but to provide wealth for themselves and their families. But if this
wealth cannot be preserved the incentives for private participants are waned and that hurts the economic outlook. Thus the government's actions enclosed in the
Keynesian framework are only hurting economy.
Here is analogy: one wants to build a house (business). But if the ground is shaky (money value) a prudent person wouldn't engage in such construction. Only risky
person (speculator) will start building house in such circumstances.
This is why I think that Mr. Bernanke should be fired as quickly as possible. It was a bad policy to give such important practical position to an economic professor. He
actually started experimenting with the US and world's economy there by applying his unverified and doubtful theoretical constructs.
Regards.
Rien Huizer | November 2 2:34pm | Permalink Report
Why waste a whole article on this anachronism? Gold is unsuitable of course, but there is nothing else that could be used to muzzle voters. Why do these people not
accept that the people have the right to do silly things, like following bad politicians, snake oil salesmen etc. If you do not like government in country X, move to
country Y. If you cannot, make the best of it and participate in the democratic process. Gold will not take the responsibility away to slef-govern, if you have the
opportunity.
frankthecrank | November 2 4:59pm | Permalink Report
Great piece.
You can base a currency on anything (the one we have is based on 'trust' or 'dreams' as I like to think of them (tread softly!)) land/gold ratio was a favourite of the
Egyptians/Romans (they NEVER had financial CRISES, they LIVED one :).
Mark up the actuality of the item in one format, the real, and the promises based upon it in another, the derivative or dirvs (Egyptians had a complex system of options
trading codes for future grain recipts, run by the priesthood (earliest bankers)). Nowadays we could use barcoding of some kind for accounting / leverage disclosure
and centralise the db, mitigate requirement for a great unwinding every few years, mark to market 'accounting' would be irellevant, price discovery absolutely
transparent.
Then when actualities (real / productive capital) change the dirvs are all accounted for, if they become mixed or debased (flooding! slave revolt! carthage conquered!
animal spirits slain!) everything is relative already so no leverage overhang and the pain is shared 'fairly' (whatever 'fair' means in this climate). By 'tensoring' or
linking all real wealth (as relative benefit ratios) individual bubbles are tempered, but that wouldnt be any fun!
Seriously tho, my big worry of the moment is a continuation of general deleveraging (rehypothetication) as game theory. That ship o' fools takes an age to turn
around, and there are millions who wont be able to when Gideons pidgeons come home to roost. Unpick a cats cradle by lopping of fingers.
Brian L | November 2 5:57pm | Permalink Report
Martin Wolf wrote: "In good times, credit, deposit money and the ratio of deposit money to the monetary base expands. In bad times, this pyramid collapses. The
result is financial crises, as happened repeatedly in the 19th century. To prevent this one would have to move into the world of limited purpose banking
recommended by Larry Kotlikoff, in which no financial institution would be allowed to promise redemption at par unless it held matching assets."
This ignores the fact that some 97.6% of our 'money' currently is credit, brought into existence by private banks when they make loans. This is the prime source of the
major problems today, of mounting unsustainable levels of debt and inequality, and bears no relation to the needs of society for a permanently-circulating means of
exchange.
In the 1930s Irving Fisher, Henry Simons and others - even including Milton Friedman - advocated '100% Money' (as Fisher's book was titled), and today a movement
is fast growing in the US, the UK and elsewhere, for this to be implemented - see www.bankofenglandact.co.uk/act This would provide a national currency which
enters circulation through government-spending, to remain in circulation until/unless deliberately withdrawn, if /when there appears to by too much - so adjustment to
avoid inflation/depression would be a simple matter.
@ Brian L, I am well aware of this point. 100 per cent reserve banks would not eliminate the problem, as I explained. One would have to make it illegal for any
institution to promise to redeem sums lent to it at par, unless backed by exactly matched assets. That is exactly what Kotlikoff's proposal does. So the value of all
claims on financial institutions would be revalued constantly, like mutual funds.
@Rien Huizer, I "wasted" an article on this anachronism, because lots of people seem to be interested, because fiat money does not seem to be doing too well.
@ Ian Campbell, I take your point about the irrelevance of gold. But there can be no elimination of ZIRP without a policy to eliminate the debt overhang. That is really
hard to do. It means writing off a large qauantity of bank debt. That would probably trigger another crisis. We really are between a rock (ZIRP, etc) and a hard place
(mass bankruptcy)..
@ Nick Antill, This article is largely about the first of the two points you raise.
7 of 16 11/9/2010 2:10 AM
I think the biggest issue with the "gold standard" is that it virtually eliminates international direct bank-to-bank transactions, i.e. all transactions have to go through
central banks (some kind of national clearing houses).
Otherwise countries will risk losing their gold reserves (bank in one country directly lends local "paper money" to bank in another country and second bank wants to
convert foreign "paper money" into gold in the first country's central bank).
Stephen Streater | November 2 8:14pm | Permalink Report
Let's let people who want to settle in fiat use fiat. And people who want to settle in gold use gold. We'll soon see which people prefer.
And all this nonsense about regulating away risks - it'll never happen. "No risk" is an illusion. I'd like to see the option of saving in unregulated banks. They'd have to
understand their loans if they wanted to stay in business.
One way to stop panics bankrupting banks is to partially convert loans to equity in panic situations, so the bank will never go under. Then, as loans are repaid to the
bank, share buybacks could return cash to depositors. The point is that the current situation is so bad that many ideas would be better.
Continue ...
Yup, “gold standard” will just create unlimited arbitrage opportunities and nothing else.
For example, let me assume that price of gold on market is $X per ounce and “gold standard” is $Y per ounce.
If X > Y then it is worth to borrow “paper dollars” from banks, convert them into gold at FED, and sell gold on the market, return loan to banks and have profit.
Example A: X = 25, Y = 20. If I borrow $1000 from bank, convert them into 1000/20=50 ounces of gold, sell them on market for 50*25=$1250, repay $1000, and enjoy
$250 as profit.
Likewise if X < Y then it is worth to borrow gold from investors, convert them into dollars at FED, and buy gold on the market, return gold to investors and have profit.
Example B: X = 20, Y = 25. If I borrow 50 ounces of gold from investors, convert them into 50*25=$1250 at FED, buy 1250/20=62.5 ounces of gold on market, return
50 ounces of gold to investors, and enjoy 12.5 ounces of gold as profit.
steve heller | November 3 4:17am | Permalink Report
We are going to go back to a gold standard, no matter what anyone prefers. Once the current "international financial system" lies in ruins (which is likely to eventuate
in the next year or two), there will be no alternative. Would anyone take a piece of paper that says "one bancor" without having the slightest idea of what that
represented in purchasing power? Read von Mises or Rothbard on the preconditions for the emergence of money on the market, and you'll see why gold is going to
be the next currency... after a lot of completely unnecessary suffering.
steve heller | November 3 4:25am | Permalink Report
And by the way, what I mean by "gold standard" is that money will be a weight of gold, i.e., one gram or one ounce. That is, you will get bills and paychecks
denominated in gold grams (for example), and you will be able to go to the bank to withdraw your gold grams/ounce coins. Any banker who doesn't pay out the gold
on demand from a demand account will be considered a thief and will be prosecuted to the fullest extent of the law. This is the situation with every other storage
facility, so all we need to do is to bring "banking" (i.e., money storage) in line with everthing else.
And to answer some of the questions posed by other readers:

1. You do NOT need an expansion of the money supply to fuel economic growth. Falling prices are a fine environment for economic growth, as we saw in virtually the
entirety of the 19th century.
2. There will be no arbitrage possibilities, as money will be gold and gold will be money. Can you arbitrage a ten-dollar bill against one-dollar bills? Similarly, it will be
impossible to arbitrage one gold coin against another as their values will have exactly the ratio of their weights.
3. Yes, you can currently own gold to protect yourself against government counterfeiting. However, you have to pay capital gains tax when you "sell" it to purchase
other things. Of course, this will not be the case with an actual gold standard such as I am describing, as gold will be money; you won't sell it, but will spend it.
francobollo | November 3 10:56am | Permalink Report
I agree with Martin, but I don't think anyone seriously thinks or expects that we could return to a gold standard in 2010. Plutonians (I am trying to think of a bland
collective word for all wealth-preserving investors) buy gold as an inflation hedge when they think all other inflation hedges (equities, commodities, property, inflation-
linked government bonds) are overpriced. In the past it has been a good hedge for volatile conditions, whether inflation or deflation, so the plutonians' preference for
gold reflects their correct concerns about their ability to preserve their wealth in an increasingly dangerous and unpredictable world. Gold has the advantage that it is
culturally synonymous with wealth, it is in fairly fixed supply and is susceptible to ramping and associated talk of creating a new gold standard. (Gold has an
additional advantage that it can be held offshore in physical form so that it can be used to evade tax. And in times of revolution - as might occur for instance in
countries where inequalities are rapidly increasing and where the wealthiest 1% now own nearly 50% of the net assets - it has the advantage of being reasonably
portable). The plutonians' hope is that central banks will succumb to the talk and the pressure and buy more gold, thus pushing up the price. Gold itself was always
just a fiat money however and one hopes that central banks are a bit smarter than to fall for that old ruse. A hefty tax on all holdings of non-industrial gold is surely the
answer - it will raise a large amount for governments, will be a progressive tax (Cameron and Clegg could both in unison proclaim its 'fairness') and also has the
benefit of taxing an entirely non-productive asset. At the moment we seem to be experiencing a distorted parable of the talents ('you good and faithful servant, you
buried your money in the ground by investing in gold and now you must be rewarded many times over'). Governments need to give the plutonians good reasons to
offload their gold - and so reinvest productively in the societies whose membership and protections they enjoy.
8 of 16 11/9/2010 2:10 AM
steve heller,
You don't understand the prerequisite for arbitrage. Arbitrage is caused by two different prices of gold – one “fixed” price (gold standard) and another “flexible” price
(market price of gold).
And you can't eliminate such price duality. How can you do it? Prohibit the market for gold? Then you have to deal with “black market.”
So, here is a fundamental problem with gold standard – it fixes the price of product (gold). And the “fixed” price will cause whole bunch of problem – arbitrage, black
market, shortage etc.
@ steve heller, so we are going back to the gold standard in the next one or two years. How much of your wealth are you willing to bet on this?
Incidentally, the value of gold is just as much an arbitrary convention as the value of bancor. The government can change the gold weight of a unit of currency, at will.
It has done so in the past. It would do so in the future if it had the chance. There is no such thing as depoliticised money. To think otherwise is to engage in a fantasy.
But you are right, vis a vis @AK. If the mint is prepared to coin gold at a set price per ounce, that will determine the market price for gold, in terms of the unit of
account. The arbitrage works by moving gold into and out of coin. So, if the market price of gold is above its value as coin, people will turn coin into ingots, so
reducing the money supply and raising the value of coin, and vice versa. This mechanism is well known.
Banking is not just storage, by the way. It is also a system of payment.
@Francobollo, I agree that investment in gold is a waste of resources. It would be acceptable if it delivered stable money. It would not do so, however.
Mr. Wolf said,
>> If the market price of gold is above its value as coin, people will turn coin into ingots, so reducing the money supply and raising the value of coin, and vice versa.
This mechanism is well known.
I think you are wrong here. The value of coin is "fixed."
If the market price of gold is above its value as coin then there will be no coins soon in circulation. This mechanism is well known from history books.
royll | November 3 8:22pm | Permalink Report
@ Martin Wolf:
"@ Brian L, I am well aware of this point."
If you were well aware of it, you could not have called our current monetary system a fiat money system. It is not. It is a debt money system: money consists almost
entirely of private borrowers' debts to private banks.
Historically, the debt money system is the most recent, and the least stable, of the three types of monetary system: commodity money, fiat money and debt money. In
a fiat money system, money consists of tokens issued by government and accepted in settlement of debts by both government and (by government fiat via the courts)
private creditors. The gold standard is a commodity money system: money consists of a commodity that is generally accepted in exchange. Calling our current system
a fiat money system, and claiming that government creates the money supply (and captures the seigniorage), is disinformation, pure and simple.
It is also not the case that a true fiat money system is inherently susceptible to political control and thus inflation. It would be a trivial matter to make the Mint
accountable to no politician, but simply responsible for keeping the price of a fixed basket of commodities from increasing by, say, more than 2% or less than 0% a
year by minting appropriate quantities of debt-free currency and delivering it to the national government to spend into circulation.
"100 per cent reserve banks would not eliminate the problem, as I explained. One would have to make it illegal for any institution to promise to redeem sums lent to it
at par, unless backed by exactly matched assets."
No. It would simply be illegal for private banks to create demand deposits ex nihilo (an activity best understood as legalized counterfeiting). Less than one person in
1000 is aware of the crucial fact that when someone borrows from a private bank in a debt money system like ours, the bank does not lend them money that others
have deposited by transferring it from some other account. Instead, it simply writes a higher balance in the borrower's demand deposit account. It appears you may be
one of the 999+ not aware of that fact.
"That is exactly what Kotlikoff's proposal does. So the value of all claims on financial institutions would be revalued constantly, like mutual funds."
Bonds are currently rated, and their value (and thus effective interest rate to the owner) varies accordingly. There is no reason private bank obligations could not be
treated analogously.
9 of 16 11/9/2010 2:10 AM
Martin Wolf | November 4 10:59am | Permalink Report
@ Royll, I am, of course, aware of these points.
I had thought everybody understood that what you call debt money, being backed up by a government-owned central bank with the ability to create money in infinite
quantities, is a child of fiat money. Debt money could not survive, in the long run, without a central bank.
I presume you are not suggesting that all money should be coin. So I presume you are in favour of 100 per cent reserve banking.
Mints have always been under political control, to a greater or lesser extent. Depoliticised money is, as I have argued, virtually nconceivable, whatever the system.
The ability to determine what money is is always open to abuse.
Martin Wolf | November 4 11:00am | Permalink Report
@AK, the value of a coin, in terms of goods and services is not fixed. If there is a collapse in the money supply (because coins are withdrawn from circulation), the
price level will fall, in terms of the unit of account, and vice versa.
Mr. Wolf,
It didn't happen in history. And here is why.
The price level falls when there is collapse in solvent demand and not in the money supply.
When there is collapse in the money supply the participants start engaging in the barter (moneyless) transactions.
royll | November 4 9:54pm | Permalink Report
@ Martin:
"I had thought everybody understood that what you call debt money, being backed up by a government-owned central bank with the ability to create money in infinite
quantities, is a child of fiat money."
But in fact, it isn't; and the Fed, as one example, is not government owned. Private banks began issuing debt money shortly after modern banking began in
Renaissance Italy, and no central bank was involved. Money at the time was gold and silver, not fiat money. Private banks do not need a central bank to "permit"
them to issue debt money. They are very eager to do it even against the explicit opposition of a central bank. The function of the central bank has been to try to
control it. But why not just control the money supply directly, through the Mint?
"Debt money could not survive, in the long run, without a central bank."
It is a little early to say it can survive in the long run even WITH a central bank, and historically, it is not clear that debt money survives much better with a central
bank than without. The apparent long-term survival of debt money issued under the sanction of the Bank of England and the Federal Reserve may be more a
function of the fact that the issuers enjoyed the (largely unwitting and likely unwilling) support of the taxpayers of the world-dominating economies of the time.
"I presume you are not suggesting that all money should be coin. So I presume you are in favour of 100 per cent reserve banking."
The reserve ratio is not the point. Private banks' creation of money ex nihilo in order to charge interest on it is the point. It's just legalized counterfeiting. The principal
difference, which is sufficient to deceive almost everyone as to the nature of what is being done, is that the banks do not pocket the seigniorage, but only the interest
on it.
"Mints have always been under political control, to a greater or lesser extent. Depoliticised money is, as I have argued, virtually inconceivable, whatever the system."
Not so. The Mint could be legally required to meet a fixed, objectively and publicly verifiable standard of money issue based on the prices of widely traded standard
commodities. Anyone could look up the prices and do the calculations himself, then check the result against the public record of the Mint's money issues.
"The ability to determine what money is is always open to abuse."
True, but it will be more or less open to abuse depending on how that determination is made, and what money is deemed to be.
10 of 16 11/9/2010 2:10 AM
Jeannick | November 4 10:48pm | Permalink Report
graeme_b, you might have something on using energy as a currency ,

food commodities also could be used since food is energy
generally, all commodities would do the trick
post war Germany used cigarettes, a great medium since it is destructible and cannot be faked
There is many problem with the gold standard and one advantage
the single plus is, as you point out, to remove the government hands from the ever flowing cookie jar of fiat money
the problems are many
It imply interests of close to zero, great to protect value but not exactly suitable if one want some growth
hoarding is a natural consequence of using gold, not so good for a trading medium
Gold production is dropping, with assay down to one gram per ton
production is restricted to a few countries, this could lead to severe manipulation by a de facto cartel
Government ditched it as soon as things got sticky

salmon Chase, U.S. treasurer, issue government bonds directly to the public during the civil war
he wanted to escape the clutches of banks who were bound to hold "species"
the bonds were a roaring success, since they were legal tender to pay taxes and were convertible to gold
those greenbacks were being even used by the confederates
France and England suspended the gold convertibility at the outbreak of WW1
an atempt by Churchill in the interwar years to reestablish it failed miserably
Nixon, faced with dire budgetary problem, dumped the fixed rate
P.S.
Silver was the financial reference for most civilizations, gold was way too rare to be useful
the first British tax was Danegeld, raised to pay off the viking raiders, it was in ( literally )pounds of Silver
the flood of bullion coming from the Americas was silver from the Potosi mines,extracted with mercury
it was used by the Spanish crown to pay its debt to its ( often Genoese ) bankers
The arrival of the yearly treasure fleet was awaited anxiously by all of Europe trading centers
a delay, a bad cyclone or attack by corsairs would precipitate a chain reaction of bankruptcies
the drain of silver to the East was a constant problem ,
China refusal to accept anything else for payment for tea led to the East Indian company trading opium
it was a financial success, the Chinese Empire was beaten in the opium wars, in the name of free trade
Adrian Buckley | November 5 7:03am | Permalink Report
Mr.Wolf,
You quote Leland Yeager, Bennett McCallum, Milton Friedman, but not Adrian Buckley? Three years ago at lunch I suggested to you that the world was collectively
bankrupt, the monetary system was in its early stages of collapse and that Gold would reassert itself. You challenged my every point stating that holding gold was
"risky" and the high ($800/oz) price would soon fall. I argued as best I could, against one of the smartest, best read people I have ever enjoyed lunch with, that
Governmental, Banking and establishment opposition to Gold was essentially self serving and that at a time in the not too distant future deficit spending to oblivion
and easy bank credit would be a thing of the past. It just seemed obvious to me as an untrained observer of the monetary system and businessman. to say I felt
intellectually challenged during our lunch is an understatement, but I couldn't fathom why you didn't see what to me was so blindingly obvious. I then daringly
suggested that perhaps the purpose of your annual Bilderberg meetings with the Chairmen of the globes banking fraternity was in some way a conspiracy to support
the notion of debt money which allowed them to control planet earth and its debt engorged peons, as I saw it there was and could be no other reason, because if a
trinket merchant from Leeds could see what was happening then you, an intellectual Goliath to my David, must understand far more clearly than me that I was correct
in my meandering prognostications, but you claimed it was a silly notion... the only answer then was that you were part of some conspiracy to manage peoples
perceptions and you took the job so seriously that the mask never fell even during lunch with an irrelevant northern blockhead. I apologise if you see me as some sort
of conspiracy nut job, but you made me that way. I knew in my heart that those silly stories about a conspiracy to suppress the price of Gold and Silver by HSBC and
JPMorgan were just that, silly stories, but then last week the CFTC had two blockbuster releases, judge George Painter and Commissioner Bart Chilton stated that
JPMorgan and HSBC were gulty of devious manipulation and that the CFTC acted to ensure no complaint ever succeeded by corrupting the legal process. WOW I
thought, I was right all along, these racketeers have been cleaning out investors systematically over decades illegally and corruptly. Well thank you Martin but I wish
to have no part in a corrupted Fiat/Debt based world and will hold my small store of old yeller until such time as a gold standard is re imposed, if not by the Bilderberg
group, then by the markets that refuse to conform to the wishes of that annual shindig. All holders of gold and silver will be rewarded in heaven and on earth for
honouring honest weights and measures, and rejecting the fraudulent financial system and den of thieves and vipers that run it as President Andrew Jackson so
eloquently put it.
In short Martin your summation is wrong, the world WILL go back to a gold standard of some sort because the world is watching a 1000 trillion dollars of fraudulent
OTC derivatives explode, the world remains collectively bankrupt three years after we met, the fraud of giant financial institutions goes on unabated and ultimately the
people will join together in rejecting the system that has been so horrendously abused at their expense. The gold standard that could be employed would be Prof.
Antal Fekete's gold standard cum real bills proposal which can be read by interested parties at http://www.profess...terSuddenDeath.pdf . Professor Fekete explains
clearly how a real bills gold standard would work very well thank you very much, he gives lots of historical precedent, and explains why the gold standard wasn;t
reinstated after WW1 properly as a means to restrict Germany's trade. I am not a gold fetishist Martin, rather I am betting against the madness that modern finance
and modern politics has become.
11 of 16 11/9/2010 2:10 AM
Adrian Buckley said,
>> you, an intellectual Goliath to my David, must understand far more clearly than me
He is a smart guy (no doubt about it) and a very well-read person. But he isn't a systemic thinker. I would say he (as well as many modern-day prominent economists)
is an eclectic thinker. Their beliefs consist of results from different school of thoughts where they (results) often contradict to each other. The problem IMHO is that
those results are mostly based on some shaky philosophical assumptions instead of the strong body of mathematical axioms.
Enrique | November 5 6:29pm | Permalink Report
I propose something better: a graphene standard.
well, in a decade there will be so much graphene it will be worthless.
So better a platinium standard
Or a lithium standard. Lithium will increase its value as electric cars will be also powered by lithium.
Gold is not much in use these days. Much better lithium
Enrique | November 5 7:10pm | Permalink Report
LITHIUM STANDARD, that is the way for the future.
Jeannick | November 7 1:37pm | Permalink Report
To Adrian Buckley, .....Right on brother !

However keep in mind the old saying that given the choice of a conspiracy and a stuff up ,
always go for the stuff up .
Anybody on the inside will voice opinions promoting the insider view ,
our host is certainly way better than a couple of thousand other economic commentators ,
small praise indeed
many of them make the union of soviet writers seems like free spirits
Hendrik Rood | November 7 8:43pm | Permalink Report
You wrote:"One obvious objection is that this would generate huge windfall gains to holders of gold. More important, if policymakers set this initial price wrong, as
they certainly would, they could unleash either deflation or inflation: the latter is far more likely, in fact, because private holders would start selling their gold to the
central banks at such a high price."
As you noted above there are a set of economists that advocate the creation of inflation. The interesting point of your analysis is that returning to the Gold Standard
would more likely result in the same phenomenon.
Isn't the current policy of extremely low short-term interest rates generating huge windfall gains to banks, who are allowed at the discount window of a central bank in
contrast to ordinary businesses in the non-financial sector of the economy? So isn't this just a choice who profits from the windfall gains?
Thus, a program of Quantitative Easing, where the Central Bank buys Gold is inflationary, while all the Gold Bugs at the same moment will cry out their victory as the
Government / Central Bank finally buys sound money.
That policy, raising the Gold Reserve, then looks as an extremely easy sale for the Federal Reserve to a Congress dominated by Republicans, while in the mean time
realising the desires of those economists on the left that plea for a considerable rise in inflation.
Off-course, the key point of Gold Bugs is that the government should issue Gold coins, not buy up Gold coins and bullion in exchange for paper money.
12 of 16 11/9/2010 2:10 AM
Equivocation | November 8 7:16am | Permalink Report
@Martin Wolf,
"So what would be the objections to such a system? There are three: difficulties with the transition; instability; and lack of credibility."
Transition - The current monetary system has collapsed. Yes, transitioning to full reserve banking will be traumatic, but not much more than trying to inflate our way
out of the fiat currency collapse. By the way, the gold / fiat currency exchange rate can easily be fixed at whatever price governments want and converted by force.
Private holding of gold can also be outlawed (as was done in the past).
Instability - Most of the instability in the financial markets are due to fractional reserve banking. If all transactions are with the same currency (gold), then price
instability is eliminated. You are correct gold can lead to deflation, but only productivity gains deflation. Prices go down because there are more goods chasing the
same limited supply of gold. This is a good thing. People are encouraged to save, their purchasing power rises, and consumerism is reduced (good for the
environment)
Lack of credibility - Ok, you lost me there. If you have full gold reserve, then you have full credibility. If a country decides to change the peg, then it will have to face its
own citizens. Nobody else.
"A far more important problem is that of financial stability. Economists of the Austrian school wish to abolish fractional reserve banking. But we know that this is a
natural consequence of market forces. It is wasteful to hold a 100 per cent reserve in a bank, if depositors do not need their money almost all of the time. Banks have
a strong incentive to lend some of the money deposited with them, so expanding the aggregate supply of money and credit."
Martin, this is plainly wrong. Fractional reserve is a market phenomenon only as much as you would consider counterfeiting or fraud to be market phenomenon.
Fractional reserve is in fact a government granted monopoly given out to bankers. If you check your Bank of England history, you will see that it was only legalized so
as to help pay off the debts from the Thirty Years War. It was closely related to the South Sea bubble, an incredible case of government sponsored fraud.
Fractional reserve lending does not increase wealth. You are only increasing currency units. The effect is only to cause inflation and redistribute existing wealth (to
the government and to the people with tangible assets).
What is so hard to understand that increasing the number of poker chips on the table does not actually increase the wealth that was placed on that table?
Regards,
Equivocation
PS: What a difference 6 months makes. Back then, us Austrians were a sect. Now it seems like this sect includes some of the most influential Central Bankers. We
are finally going to have the chance to retrain several thousand Keynesian Phd's.
Equivocation | November 8 7:49am | Permalink Report
@AK
"He is a smart guy (no doubt about it) and a very well-read person. But he isn't a systemic thinker."
Yes. Martin defines himself as a pragmatist. In reality, he seems to chose a conclusion and then develops the arguments to defend it. His articles are often times
contradictory amongst themselves. Like many modern scholars, he is led by ideology and not by the systematic pursuit of Truth.
@Martin
It is not about using a "gold" standard. It is about selecting any monetary system that retains value and cannot be easily inflated. Gold is the best proxy for this. It is
naturally rare, expensive to mine, of limited industrial use (you don't want to consume money), and indestructible once created. There is a slight problem with it being
more readily available for some nations (which is one of the reasons it was abandoned). But at least this "printing press" is more spread out than under the imperial
dollar fiat system.
Other Bancor inspired systems could be considered, but they face complex rebalancing issues. But hey, I prefer Bancor to fiat.
wcm | November 8 12:16pm | Permalink Report
http://www.ft.com/...html#axzz14cquXWhK
"The issue is not so much whether Mr Weber is right about the bond purchases."
More comment on where and how Mr Weber might be right--or wrong--would seem a fair expectation from the FT.
13 of 16 11/9/2010 2:10 AM
snowballcapital | November 8 12:52pm | Permalink Report
Dear Mr. Wolf, the below letter regarding the Icelandic collapse was sent to you and DB the 15th of January this year. The debate regarding a gold standard is a
limited one. An overall standard should be debated. Please widen the debate, after putting the debate regarding a gold standard for a foreseeable future on the scrap
heap.
Sincerly
J Hultén
Your balanced article could mean the end of world.

(“How the Icelandic saga should end” FT jan 15th 2010)
Dear Mr. Wolf,

Your balanced article about how the Icelandic saga should
end, could actually do more damage than good. It is convincing both from a
practical as well as a moral point of view.
It will most surely carry heavy weight in the debate.
A small aspiring hope of an alternative solution could be snuffed out.
A solution to abolish the Icelandic Krona, and institute the SkandiKrona.

A currency pegged by the price of Hydrogen.
A hydrogen currency standard.
Hydrogen, an asset Iceland may produce plenty of, that has a world market price.
Lord Myners faced with this bold move, would do good writing off the debt in
return for claims on assets.
Iceland has the ambition to become the worlds first hydrogen based society,
and a move into a Hydrogen standard would certainly focus not only the
population of Iceland to produce and use hydrogen cheaply and efficiently,
but maybe an expanding set of countries in the vicinity. The primary
lenders through IMF, the Scandinavian countries Norway, Denmark, Sweden,
would do very wise to mend their political ways, and consider an alternative
currency to the Euro. One Central bank covering the the whole hydrogen
currency area.
Who knows, even the Chinese might be willing to join. The dollar makes the
Chinese nervous, and the internal Euro debate regarding Greece does not lend
comfort to any investor. The gold standard pundits, does however have it
wrong. One must see to the long term use of the goods a standard should be
based upon. (It might include farmable land, drinkable water and so on.) If
the cost of producing hydrogen slips, which it likely will do in an
increasing rate if a Hydrogen standard is implemented, it will mean cheaper
(hopefully cleaner) energy, which will result in higher growth, which, etc
etc and so on.
Maybe a brief comment from you about this schemes impossibilities, would
enlighten the many that holds a faint hope of such a bold move, to either :
shut up, or raise our voices.
Yours sincerely,
J Hultén
lquaint | November 8 1:09pm | Permalink Report
There is so much wrong with this desperate attempt to rationalise a dishonest and unstable system. Here are just a few contradictions/inaccuracies:
1) “One obvious objection is that this would generate huge windfall gains to holders of gold.”
But of course it’s OK for those ongoing windfall gains to accrue to the fractionally-reserved banks at the expense of the factors of production.
2) “Such a world of trend deflation is liable to depressions if or when the equilibrium real rate of interest is less than the rate of deflation.”
Hogwash. Only true if the lending system is fractionally-reserved.
3) “A peg to gold may prove radically destabilising for any currency if other significant countries failed to sustain domestic monetary and financial stability.”
That’s the exactly one of the deterrents that advocates of a gold standard seek.
4) “There could then be floods of gold into or out of a currency that is well managed.”
Well, the point is that, under a gold standard, currencies a neither well nor poorly managed. They’re not managed at all.
It's time to take the definition and administration of money back from the politically-advantaged. A gold standard shines the light on these illicit parasites. That's why
the parasites fight its return.
14 of 16 11/9/2010 2:10 AM
bernhard-otto | November 8 1:10pm | Permalink Report
Martin as we all know, "Timing is everything" and now there exists the increased discussion to dump the Dollar as the worlds base currency. I understand your writing
in such a way, that you want to proof that the world has to go on to live in a Dollar Universe since gold would be hell for everybody. But this is the big question now.
The 100 trillion Dollar question (or more) on a worldwide scale. Only time will tell!
Chan Kwong-Shing | November 8 2:22pm | Permalink Report
Martin,
after the event of today, you obviouly knew something we didn't. Who would have thought Zoellick advocating Bretton Wood II? Last week I thought this topic was
rather fanciful and not worth thinking about. I shall pay more attention in the future.
robert shrimsley | November 8 2:53pm | Permalink Report
WCM, you might be interested in the editorial we ran this morning: http://www.ft.com/...html#axzz14hdgvCa0
Richard Ebeling | November 8 3:04pm | Permalink Report
The crucial element is to impose some type of external check on the ability of governments (or their central banks) from possessing arbitrary and unlimited power to
expand the supply of money and credit in a society.
Relying upon the dispassionate, politically-independent good-intentions and wisdom of an monetary central planning agency has proven unworkable. In his 1986
presidential address before the Western Economic Association, Milton Friedman stated that Public Choice theory had convinced him that governments and their
central banks will never have the incentive (in the long run) to not manipulate the money supply and interest rates for political reasons. And that his long advocacy of
a "monetary rule" had been misplaced and a waste of time.
The gold standard, no doubt, can be manipulated and misused by governments and central banks, also. Indeed, that is way the gold standard during and after the
First World War came to an end, at least in the form that it has operated before 1914.
But some method must be found to remove the hand of government (and its central bank) from the hand of the monetary printing press (or the keyboard of the central
bank's computer monetary printing press).
it is necessary to think "outside the box" of conventional thought concerning the nature of the monetary regime. One alternative, as you point out has been proposed
by Leland Yeager, is the separation of money from the state, through abolition of a central bank, and a shift to private, competitive free banking. Economist such as
Lawrence H. White and George Selgin in the United States), and Kevin Dowd (in Great Britain) have argued for such a "denationalization of money" in place of
monetary central planning.
This would not be looking backward to the past, but to the future and the establishment of a private alternative to "monetary socialism," which, indeed, is what central
banking really is all about. Radical? No doubt. But so has been the elimination of other forms of socialism and planning over the last several decades in various parts
of the world.
Richard Ebeling
Viktor O. Ledenyov, Ukraine | November 8 3:41pm | Permalink Report
The short answer is "No."
Viktor O. Ledenyov, Ukraine
mboucher001 | November 8 4:50pm | Permalink Report
first realize who wrote most of this – the world bank was one of the many institutions created after WWI and WWII to “replace” the gold standard. The first objection of
the absurdity of settling balance of payments via shipping gold is ridiculous. A paper system managed by the BIS could electronically shift settlement without the need
for massive shipping of gold. The objections to culling out fractional reserve banking is an example of not being able to see the world out of a modern context. To say
that fractional reserve systems were created by a free-market is absurd – it has chronically been a house of cards throughout history and is usually implemented as
an attempt to gain economically by the banks/metallurgist with government sanction. The objections to less price stability also is a combination of not being able to
imagine the world without massive debt, and not looking at history. Price stability was orders of magnitude higher under gold standards than any other system, for
thousands of years. There is nothing inherently wrong with deflation if the system underneath it is not an over-indebted house of cards, and a 100% convertible gold
standard does not allow that to happen. Rather deflation in response to trade deficits acts as a fast realization that competitive levels must be boosted or relative
living standards will continue to fall. There is no history of “trend deflation” being “liable to depressions” absent a debt-based system! Deflation was actually
accompanied by the most robust growth in US history! Deflation is only bad if loans are based on the assets that fall in price by an excessive amount. There can be
no flood of gold into or out of a currency if that currency is 100% backed by gold. This author simply cannot conceive of what a 100% convertible gold standard really
is, and is only capable of thinking of currencies as fiat vehicles. In a 100% gold standard the only movement of gold is based on excess importation or exportation –
and that is actually one of its greatest strengths, not a weakness. Again the objection that the ratio would be forced to change is a construct of a partial fiat partial
gold linked system, of the 1930’s that was not a 100% convertible gold standard. The problem was that more currency than gold was produced, leading to a credit
boom. The additional problem was that excess trade was held in foreign currencies so that trade didn’t balance, and this led to increased debt and currency
production beyond gold levels. In a 100% convertible system this cannot occur and trade actually BALANCES. Gold/money supply (they are the same in such a
system) goes down in the excess importer, so prices fall, and gold supply goes up in the excess exporter so prices rise, until a balance of gold and goods is reached
that truly balances trade and optimizes concentration of goods in each country where they have the highest comparative advantage to the benefit of all (try reading
David Ricardo again!). These are not true objections to a 100% gold standard, they are misunderstandings of what such a system is or means.
Mojtaba Jalali | November 8 5:21pm | Permalink Report
Dear Mr. Wolf,

The argument for a change in worlds monetary system are largely inconsequential as stability is decided not by what type of money we use but the way the system is
managed by governments around the world. Both, the gold standard era as well as the modern monetary system have seen financial crises as well as periods of high
inflation which is at least partly proof that stability is less reliant on a particular system than on the behavior of governments. Therefore, you could base currencies on
oil or land or steel but eventually its stability will be reliant on actors' incentives and behavior.
15 of 16 11/9/2010 2:10 AM
Ian Campbell | November 8 5:27pm | Permalink Report
Martin
A few days away so late in response to your comment re. the ending of ZIRP.
At the end of the day the debt overhang is so large in so many countries and/or sectors (eg housing in the USA, Spain and Ireland) that it is going to be at least
partially, and in some countries' cases substantially, resolved by the 're-scheduling' of debt. Having avoided the precipitous off the cliff far better to now allo wthose
dead parts of the economy to slide to the bottom and be done with the consequences sooner rather than later.
For example, US, Spanish and Irish banks are running out of time for the needed recovery in asset prices to materialise sufficently to enable those debts to be
covered by (more) equity injections and flexible accounting conventions (rule bending). So surely better to end ZIRP in realisation of this reality rather than wait until
'all means' have been found wanting. Far better to encourage the early return to enterprise while acknowledging that there will be those who will suffer from the
induced crisis implied, but that they will be offset by the sectors that can be encouraged into recovery/expansion. This is especially so as (in this example) property is
the weight hanging around so many necks who had little to nothing to do with the excesses that are holding the rest of us back.
At present we are all dancing around economic handbags waiting for the next move, whether its a Fed QE2 announcement or a G20 meeting, most of which are
destroying more confidence than they can reasonably be expected to build.
BaldrickforPM | November 8 5:44pm | Permalink Report
I would strongly recommend the introduction of a "purest Green" monetary standard overseen by that powerhouse of economic theory, Lord Percy. After all, how
much worse could it be ... ?
wcm | November 8 5:49pm | Permalink Report
>>Mr Shrimsley -- Please note the link above my comment.
As for Bretton Woods II, the US--or more appropriately those who equate US hegemony and Global Governance as necessary conditions for our Planetary well
being--are playing a very dangerous and opportunistic game. The poster iquaint rightly states that the exissting (US-directed) System is "dishonest and unstable".
Those who've believed in markets and collective incentives for discipline have seen nothing yet.
I'm not confident one can rely on the Chinese to exercise an objective check on any "Global" game. It has been more often observed that they prefer to step back
from contentious noise and principles-based pretensions and then outwit and outsmart in the markets.
Who audits sovereign gold holdings? Please do not respond "the Big Four".
I put the following comment to Mr. Zoellick’s article. I think it may be appropriate here also.
======
Any replacement system has to be against the will of the US since it would definitely damage the current state and perspectives of the US economy.
Can it be done from a practical point of view? Would the US tolerate such global change or would the US go on war with the whole world and particularly with its
most vocal challengers like China and Germany?
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16 of 16 11/9/2010 2:10 AM

Could The World Go Back To Gold Standard

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Could the world go back to the gold standard? | Martin Wolf's Exchange: ... http://blogs.ft.com/martin-wolf-exchange/2010/11/01/could-the-world-go...

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Could the world go back to the gold standard?

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November 1, 2010 11:41am in Central banks, Economics | 71 comments

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gareth davies | November 1 12:53pm | Permalink Report

Oh like Oil today then!

Sounds like an article you wrote a while back.

devereux5000 | November 1 4:26pm | Permalink Report

devereux5000 | November 1 4:29pm | Permalink Report

devereux5000 | November 1 4:32pm | Permalink Report

Martin Wolf | November 1 7:26pm | Permalink Report

John Affleck | November 1 8:00pm | Permalink Report

graeme_b | November 1 8:18pm | Permalink Report

Danny Barrs | November 1 9:20pm | Permalink Report

graeme_b | November 1 9:51pm | Permalink Report

AK | November 1 10:13pm | Permalink Report

Mr. Wolf said,

A Nassim | November 1 10:17pm | Permalink Report

Whether we like it or not, we are going back into the future.

Philip Copley | November 1 11:13pm | Permalink Report

Carol Wilcox | November 1 11:33pm | Permalink Report

2. Other proposals are for privatising the creation of money altogether.

Alexandre Lucas | November 2 12:07am | Permalink Report

Andrew Davison | November 2 12:29am | Permalink Report

Philip Copley | November 2 12:32am | Permalink Report

You ask a loaded question. First of all this:

Adrian Vichie | November 2 12:57am | Permalink Report

The Slog | November 2 7:43am | Permalink Report

Åge Olav Mariussen | November 2 7:58am | Permalink Report

karenhelveg | November 2 8:33am | Permalink Report

Åge Olav Mariussen | November 2 8:46am | Permalink Report

Nick Antill | November 2 10:04am | Permalink Report

stockburger | November 2 11:16am | Permalink Report

Ian Campbell | November 2 11:46am | Permalink Report

Anthony J Peter | November 2 11:53am | Permalink Report

AK | November 2 2:13pm | Permalink Report

But this is a tactical issue. Another issue is of strategic importance.

Rien Huizer | November 2 2:34pm | Permalink Report

frankthecrank | November 2 4:59pm | Permalink Report

Brian L | November 2 5:57pm | Permalink Report

Martin Wolf | November 2 6:30pm | Permalink Report

Martin Wolf | November 2 6:34pm | Permalink Report

Martin Wolf | November 2 6:38pm | Permalink Report

Martin Wolf | November 2 6:39pm | Permalink Report

AK | November 2 8:10pm | Permalink Report

Stephen Streater | November 2 8:14pm | Permalink Report

AK | November 2 8:51pm | Permalink Report

steve heller | November 3 4:17am | Permalink Report

steve heller | November 3 4:25am | Permalink Report

And to answer some of the questions posed by other readers:

francobollo | November 3 10:56am | Permalink Report

AK | November 3 1:38pm | Permalink Report

Martin Wolf | November 3 3:40pm | Permalink Report

Banking is not just storage, by the way. It is also a system of payment.

Martin Wolf | November 3 3:42pm | Permalink Report

AK | November 3 4:09pm | Permalink Report

Mr. Wolf said,

I think you are wrong here. The value of coin is "fixed."