Zoellick’s gaffe
Supporters of sound money were heartened on Monday by an
FT article written by Robert Zoellick, who is President
of the World Bank, in which he recommended that a new
“co-operative monetary system”, a “Bretton Woods III”
should be planned and it “should also consider employing
gold as an international reference point about
inflation, deflation and future currency values.”
Following the buzz this statement created, he clarified
it, denying that he was calling for a return to a gold
standard, rather that there is a problem to be fixed.
The markets appeared to give the original FT article
some credibility: if Zoellick was recommending a
monetary role for gold, presumably there is a chance it
will happen.
Zoellick’s article and subsequent clarification leave us
asking the question: what is the difference between
fixing a price, and a reference price? Presumably a
reference price is one that does not have to be defended
by a central bank, in which case, why bother? If gold is
to have any role, it must be credible. But this is
extremely unlikely to be even considered for two basic
reasons.
First, it is impossible to fix even a reference price
for gold in paper money terms at anything like current
prices, at a time of rapid monetary expansion. By
definition, a reference price would have to be set which
must apply for longer than the foreseeable future. A
sustainable price would also be different for each
currency, making agreement on a Bretton Woods III almost
impossible. It would be a return to fixed parities, or
at least dirty floats, which have been already discarded
in the past. Furthermore, setting a dollar gold price
at higher levels would probably cause the bankruptcy of
the bullion banks, which operate a fractional system to
back their customers’ unallocated accounts.
The
second reason for ruling out any gold discipline is that
central banks need maximum flexibility to deal with some
very serious problems. Taking the Fed as an example, it
is managing an imploding shadow-banking system,
collapsing residential property prices, growing
storm-clouds over the commercial banks and several
states on the verge of bankruptcy. Whatever we may
think about printing money and back-stopping the system
to resolve these issues, we have to recognise that the
Fed’s primary function today is to buy off a systemic
collapse by all the means at its disposal.
And
it is not just the Fed. Both the Japanese and the
British have their own serious problems that can only be
addressed the way central banks know how: by having the
ability to write open-ended cheques to buy off systemic
insolvency. The ECB does not publicly admit to having
this responsibility, but in reality it has and likewise,
will not wish to be boxed in.
The
idea that the recent rise in the gold price is based on
even a faint possibility that gold will be incorporated
in a new currency order is misplaced. Zoellick’s
article is a huge embarrassment to central bankers, who
must be wishing he had kept quiet.
11 November 2010
