The sun slowly sets on the use of the dollar as the world’s money. That’s the discussion going on within the finance ministries and central banks of the G-20.
What will follow the dollar, and when? Will it be replaced by the gold standard?
A classified cable from the American embassy in London passed by Wikileaks to The Daily Telegraph shows how well insiders recognize that there are intractable technical obstacles to use of the SDR.
So… what about gold?
On Monday, March 1, Federal Reserve Board Chairman Ben Bernanke, testifying before the Senate Banking Committee, had this to say about the gold standard:
It did deliver price stability over very long periods of time but over shorter periods of time it caused wide swings in prices related to changes in demand or supply of gold. So, I don’t think it’s a panacea, and there also are other practical problems like the fact that we don’t have enough gold to support our money supply…. I don’t think that a full-fledged gold standard would be practical at this point.
The next day one of the most prominent and respected contemporary scholars of the gold standard, Barry Eichengreen, of University of California, Berkeley, published a widely noted commentary in The Wall Street Journal, observing:
The greenback, in other words, is not just America’s currency. It’s the world’s.
But as astonishing as that is, what may be even more astonishing is this: The dollar’s reign is coming to an end.
Between Monday and Tuesday, between Bernanke and Eichengreen, lies a tale.
Bernanke, in an article he co-wrote published in the Quarterly Journal of Economics in 1996, had this to say about Eichengreen, whose treatment he calls authoritative:
The proximate cause of the world depression was a structurally flawed and poorly managed international gold standard.
For a variety of reasons, including among others a desire of the Federal Reserve to curb the U.S. stock market boom, monetary policy in several major countries turned contractionary in the late 1920’s – a contraction that was transmitted worldwide by the gold standard. What was initially a mild deflationary process began to snowball when the banking and currency crises of 1931 instigated an international “scramble for gold”. Sterilization of gold inflows by surplus countries [the USA and France], substitution of gold for foreign exchange reserves, and runs on commercial banks all led to increases in the gold backing of money, and consequently to sharp unintended declines in national money supplies. Monetary contractions in turn were strongly associated with falling prices, output and employment.
Effective international cooperation could in principle have permitted a worldwide monetary expansion despite gold standard constraints, but disputes over World War I reparations and war debts, and the insularity and inexperience of the Federal Reserve, among other factors, prevented this outcome. As a result, individual countries were able to escape the deflationary vortex only by unilaterally abandoning the gold standard and re-establishing domestic monetary stability, a process that dragged on in a halting and uncoordinated manner until France and the other Gold Bloc countries finally left gold in 1936.
Bernanke’s summary of Eichengreen demonstrates why there are so few, if any, proponents of the gold standard who consider it a panacea. Panacea? A prominent gold standard website with which this writer professionally is associated already critiqued Paul Krugman for erecting, in his blog, the straw man of “panacea.”