Gold

Nothing matches monetary theory and currency issues as a source of delirium among economists. As the G20 gets underway today in South Korea, name-calling has taken the place of diplomacy. The German Finance Minister called the U.S. Federal Reserve's US$600-billion money-printing operation "clueless," while Bank of Canada governor Mark Carney says he has "absolute confidence" in the program.

Somebody mentioned gold, and the swords are drawn again. Not a chance, said Mr. Carney. A good idea, said Robert Skidelsky, a leading Keynesian who says it's a golden opportunity to reform the world monetary system. Meanwhile, the man who started the gold rush, the World Bank's Robert Zoellick, says he didn't propose a full return to a gold standard. His objective, he said, was to point out that the gold price is sending a message that the policy fundamentals within the G20 are rotten. And that's a message -- with gold at US$1,400 an ounce--that can't be ignored.

All of which is a sure sign that world leaders, under the auspices of the G20, are assembling for another round of confidence-building meetings, at the end of which the return of confidence will seem even more remote than it is today. Surprise agreements on trade and bank regulation, or even climate-change policy, are possible, but expectations are not high.

Certainly there will be no clear outcome on currency reform and global trade imbalances, the main lightning rod for conflict at the G20. However, the sudden appearance of gold as an issue, unwelcome by central bankers, has in some ways helped to galvanize and renew an important ideological battle. Unfortunately, it is not a battle that is likely to clear the air. There will certainly be no reference to gold in any final communique. But as the price of gold soars, it draws attention to the failures and weaknesses of the world's paper-money system and its inherent inflationary risks.

Outside of the global investment community, which has pushed gold to record nominal values, official policy circles would prefer to talk about rebalancing world trade and finding ways to manipulate currencies or new techniques for printing money by the trillions of units. Then along came Mr. Zoellick, former U.S. trade rep and now head of the World Bank, who dropped the gold bomb in an op-ed in the Financial Times.

In a general overview of the state of the world economy and the role of the G20 in failing to be a model of international cooperation, Mr. Zoellick suggested that the world needs more than just currency reform and trade rebalancing. Currency reform is fine, he said, but it's a long-term project that must be accompanied by specific policies aimed at trade liberalization, privatization and fiscal reform.

On currencies, he suggested a new "co-operative monetary system" that would replace the U.S. dollar as the main reserve currency in a new regime that involved the dollar, the euro, the yen, the pound and the yuan, after China moves toward internationalization and an open capital account. Then he said: "The system should also consider employing gold as an international reference point of market expectations about inflation."

In an interview yesterday on CNBC, Mr. Zoellick clarified his position. The objective, he said, is to instill private-sector confidence in the global currency and trade system.

The point on gold, and this is the golden elephant in the room, whether people recognize it or not, it is being used as an alternative monetary asset. So I'm not saying return to the gold standard as a control of money stock. But what I'm saying is the price of gold has been telling people is that there is a lack of confidence in some of the fundamental growth policies. So gold in that sense is a reference point, it's an indicator. Now people might wish it wasn't so. But I'm describing the facts as they see it and saying to policymakers: "You have to recognize what this says about the fundamentals of the policy you are pursuing." [You can't achieve confidence with] exchange rates and rebalancing alone.... You want to get the private sector back engaged. The time of government fiscal expansion and programs has run its course.

Current-account rebalancing and currency reform won't work alone. They might even be secondary. "These currency rebalancings and adjustments will be a lot easier if everybody's growing. That goes back to growth fundamentals. And it will certainly be a lot easier if people are opening markets as opposed to threatening to close them."

All very sensible, although the ideas behind monetary policy and global currency systems are a snake pit of conflict and ideology. The mere mention of gold as part of any system drives most Keynsian economists to distraction, reflecting John Maynard Keynes' claim that gold is a "barbarous relic" and his diligent efforts to keep it out of the world monetary system. Keynes, however, had a contradictory opinion on everything, a point made obvious by Mr. Skidelsky, a Keynes biographer, who wrote yesterday in the Financial Times that Keynes would likely have approved of Mr. Zoellick's use of gold.

As Mr. Skidelsky interprets the idea, the result of Mr. Zoellick's proposal would be a new global currency system built around a "super sovereign reserve currency" with some kind of reference to gold as an anchor. This would fit with Keynes' idea that "gold would be useful as a constitutional monarch, but disastrous as a despot."

All in all, the sudden attention paid to a new gold standard is likely to fade. The prospect for some new gold standard is zero. As a result, the future of the world monetary system -- even under some new super sovereign reserve -- seems destined to ease quantitatively toward a new structure where inflationary paper continues to trump gold.