World Bank Chief Calls on G-20 to Reconsider Gold Standard
Source: Deutsche Welle, Sam Edmonds (11/8/10)
"An updated gold standard could help retool the world economy."
In Monday's Financial Times, Zoellick wrote that an updated gold standard could help retool the world economy amid tensions over currencies and the U.S.' monetary policy.
Looking ahead to this week's G-20meeting in Seoul, the former U.S. trade representative 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.
Although the gold standard helped guard against inflation, it was abandoned because it did not allow for the flexible monetary policy many economists believe is essential in counteracting economic shocks.
"Although textbooks may view gold as the old money, markets are using gold as an alternative monetary asset today," Zoellick wrote.
The new system "is likely to need to involve the dollar, euro, yen, pound and a renminbi (Chinese yuan) that moves toward internationalization and then an open capital account. The system should also consider employing gold as an international reference point of market expectations about inflation, deflation and future currency values."
Zoellick's comments came amid fears of a so-called "currency war" that would see countries jostle for trade U.S. has led accusations that China cheats in world trade by artificially weakening its currency.
But China and Germany, both major exporters, have complained that Washington's QE policy is weakening the dollar and harming emerging markets' competitiveness.
Investors are pumping dollars into emerging markets in search of higher yields, and the potentially destabilizing impact of this, along with big current account deficits and China's reluctance to let the yuan appreciate faster, are set to dominate the G-20 summit Thursday and Friday.