Might the world’s major trading economies ever return to a Gold Standard?
Notwithstanding the philosophical arguments in favour of a return to the classical Gold Standard, there would be many hurdles, underpinned by concerns over inflation and central banks’ expansive monetary policies.
At what gold price would countries return to the Gold Standard, for example? Returning at today’s gold price does not seem feasible. Concern over the value of fiat currencies would no doubt result in households redeeming fiat currencies en masse for gold, which would quickly deplete central banks’ gold reserves. They would soon be off the Gold Standard. But returning at a higher price would have important wealth distribution consequences for countries that hold or produce gold and those that don’t.
A return to the Gold Standard would also necessitate agreement and participation among the world’s major trading economies. Attempts to reach international agreement on changes to the global economic and financial architecture usually have ended in failure, Bretton Woods being the major exception8. This lack of international cooperation was the root cause of the failure of the classical Gold Standard, and is probably the most significant impediment to a new one ever being created.
Even if the problems of establishing a Gold Standard were overcome, policy makers would still need to address the fundamental problem that the annual growth in the gold stock – currently around one per cent per year – would not necessarily match growth in the monetary base.
Gold does have a critical new role to play in the international monetary system. The analysis of this new role is currently the subject of much debate internationally, a debate in which the World Gold Council is actively involved.
8Boughton, J., A New Bretton Woods?, (2009), in IMF Finance and Development, http://www.imf.org/external/pubs/ft/fandd/2009/03/boughton.htm