By Simon Johnson. As prepared for the NYT’s Room for Debate – for the context and the whole discussion, see this link.
In a world with so many instabilities, there is an understandable search for something that offers a stable value – preferably something that cannot be affected by the whim of government or the latest scheme of a central bank. Unfortunately, this search proves just as illusory as the pursuits of alchemists in pre-modern times; there is no magic to gold.
For international economic transactions, proposing any kind of return to the gold standard is equivalent to wanting more fixed exchange rates, i.e., moving away from market-determined rates and returning to the system, at least in part, to how it operated before 1971.
But it is hard to imagine how this would help with regard to the major currencies, which are again the subject of controversy today. The main issues in the US are high unemployment, an unstable financial system, and longer-term issues around the budget. How exactly would gold help on any dimension? Advocates of a modified gold standard argue that this would serve as a form of anchor to the system – but in the 1930s it proved to be an anchor tied around the neck of some countries, including the United States. Nobody needs the kind of “stability” associated with the Great Depression.
And China’s exchange rate today is controversial precisely because it is essentially fixed in nominal terms against the dollar. Adding gold as a reference point for China’s exchange rate would do nothing to affect the problem – China keeps its currency undervalued in real terms, aiming for a large current account surplus. This is unfair and violates both the rules of the exchange rate system and the reasonable expectations of its trading partners.
The world – and the G20 — needs to confront its main problems: global banks have become far too powerful, financial reform has failed, and we are setting ourselves for another dangerous credit cycle – which will again devastate jobs. The G20, incredibly, has refused to take up the issue of how to handle the failure of megabanks when these operate across borders. The failure of leadership and responsibility at the Seoul summit is profound.
Proposing a modified gold standard is at best a distraction. At worst, it may be latched onto by people who wish to further divert us from the real problems.