Should the World Return to the Gold Standard?
From time-to-time financiers and economists float the idea that the world should return to the gold standard or develop a world currency, issues taken up by Margaret Kopala in her fascinating book on long wave economic cycles, The Dog Bone Portfolio and Richard’s book, A new Case for Gold.
From my limited perspective it would be more reasonable to develop an international currency rather than return to the gold standard per se. This is not knew either as this notion was proposed by none other than John Maynard Keynes himself. It does not seem realistic to return to a gold standard. First, gold itself is a commodity, over 52% of which is consumed as jewelry (admittedly many do hold gold jewelry as a fall-back currency), 26% held as bars, coin and other investments, 6% by central banks and 16% used for industrial purposes. It is hard to maintain a standard for a product whose price is determined by supply and demand. When it was a standard, the price had to be fixed in $US which itself could not maintain its value unless inflation was kept to zero. When gold was the standard and the price was set at $35.00 per once, inflation made it impossible for many gold mines to operate profitably. President Nixon took the USA off the gold standard in 1972 and the price of gold skyrocketed. Finally, when a company tried to establish gold as a means of exchange through ATM machines, the experiment failed.
Furthermore, if the world were to return to the gold standard and the price were fixed at its current price the U.S. with about 8,000 tons of gold, would only be able to cover 34% of what is now in circulation. China and Russia are currently acquiring gold as quickly as they can. Do they anticipate gold being the de facto currency? Might they insist on it. Where would the leave Canada? Canada has no gold reserves but has more foreign currency in reserve than Canadian currency in circulation.
Ergo, using gold as a standard is highly problematic in my view.
There has been some effort to raise the stature of the EUR0 to rival the $US as a standard, but such efforts have so far fallen short. Alternatively, numerous cryptocurrencies have sprung up and some, such as Bitcoin, are touted as an answer to a universal currency. I would suggest there are at least six risks in making a currency held in private hands as a global standard:
1. There is no back-up for this currency. Gold has an intrinsic value. Strong currencies such as the Chinese Yuan, the EURO and the $US have their economies, despite their deficiencies.
2. One has to remember a password. Many have already forgotten their passwords and it is estimated the losses total $140 billion. A similar situation arises if a Bitcoin wallet holder dies without bequeathing the password. In one famous case, Gerald Cotton, the holder of $160 million worth of cryptocurrencies took his password to his grave, leaving his company Quadriga in the lurch.
3. If an inventor of a super fast quantum computer had malice of forethought, could the passwords be decoded before the cryptocurrencies of the worlds could respond? Even without the quantum computer, Bitcoin has been stolen by hackers.
4. The blockchain technology that cryptocurrencies depends on is open sourced code. That means any expert programmer can begin ‘improving’ the algorithms while someone is ‘mining for coin’, possibly causing them to compromise their investment.
5. Nassim Nicholas Taleb is abandoning Bitcoin because, in his view, it is too volatile, and the last quality you want in a reliable currency is volatility. Also, because of volatility one can get caught between a gap if you are using a buy-sell algorithm; the price can rise or drop in quantum leaps, well outside your sell/buy point.
6. While Cryptocurrency enthusiasts argue that its enormous value is in not being regulated or under the control of government, government regulation is inevitable if the currency becomes a real standard. (See article by Chi Le, Markets, 12/02/2021.)
The big question is, if we cannot standardize on gold, the $US or cryptocurrencies what should a currency to based on? Could one find a standard that could vary as world populations, economies and trade grow or decline, but are not dependent on a single currency or economy? Three come to mind:
1. Perhaps one could use GDP (gross domestic product) which includes all the goods and services produced by a country (including exports- imports). An international agency would have to be established and given full power to collect, audit and analyze data on a monthly bases. One cannot underestimate these challenges or the likelihood that countries will accurately report their data; In addition, many will need considerable assistance. If and when all consumer and commercial transitions are electronic, it might be straightforward to use GNE (gross national expenditure) as a good proxy for GDP, a time that might not be far off (see note below)..
2. Another alternative is to return to a proposal put forward by John Maynard Keynes in 1947 at the Bretton Wood’s convention. Keynes’ idea was quite audacious but might have worked better in the long run than the American proposal that was accepted and we have lived with since then, I.e. the World Bank and The IMF.
“Keynes proposed an overarching “International Clearing Union” that potentially every country in the world could join. It would create a new reserve currency, the “bancor,” that could only be used for settling international accounts, and member nations would pay a membership quota in proportion to their total trade. Countries in surplus would receive bancor credit, while those in deficit would have a negative account.
The [proposal] was also explicitly aimed at facilitating increased trade overall .. And critically, it would incentivize nations to keep their trade balanced on both sides — surplus and deficit. Run too far into deficit, ..a country would be required to devalue to reduce imports. But run too far into surplus, ..a country’s currency would be required to appreciate so as to increase imports. A bancor tax would also be levied at an increasing rate on anyone with a large trade imbalance.” (Ryan Cooper, The Week, May 26, 2016.)
I have two comments. Instead of currencies appreciating or devaluing agains the $US, it would vary against the “bankcor” currency. Second, rather than calling the levy for countries in significant imbalance a “tax”, call it a contribution to a development fund to augment international aid, along with the membership quota.
3. If Keynes proposal was audacious,my second idea is audacious on steroids, a harry audacious idea as one speaker put such notions. In his book, The West Rules — for Now, Ian Morris, uses fuel consumption as a proxy for civilizations growth and wealth for the first few millennium, about 15,000 years, because little other evidence was available. He adds other measures as time progresses but does not abandoned this one. Could energy consumption be measured using remote sensors or in-ground sensors? Gross consumption of electricity does appear to be a fair approximation as an indicator of relative wealth. China uses by far the most electricity in total but is dwarfed by US per capital consumption. If this measure alone were used, China would receive about twice the international currency credits as the US. Clearly, the consumption of other energy used for heating, cooking and transportation, for example, would have to be utilized and methods for reliably measuring them devised.
To discourage countries from wasting energy to drive up their credits, disincentives would have to be built in to discourage this by subtracting out carbon dioxide and methane emissions, for instance.
I did say this third option was more than audacious, perhaps even zany, but surly the world is ready for a new method to standardize currencies other than on the $US, Bitcoi or gold..
Notes:
A tangential question is whether we will ever get to the point of not needing anything but electronic currency. More than 30 years ago at a conference I attended, the economist Kenneth Boulding, postulated the we would not need paper and metal currency. Most transactions are electronic or do not involve actual cash exchanges. This is largely because money circulates. A $100 purchase on my part can end up in the accounts, in whole or in part, by many parties in a matter of days, possibly hours. Most people only need a small amount of cash on hand. The ratio of currency in circulation compared to average annual income has changed considerably. In Canada on 1977, for example, currency in circulation equaled about 24% of the annual income of individuals. That is, for every dollar earned in a year, there was only $0.24 of currency available. In 2019, this ration had fallen to just 6.2%.
