World Bank President Calling For A New Gold Standard? Say It Ain’t So!

Oh, to be a fly on the wall in the World Bank’s press office:

Call to bring back gold standard

World Bank says it can serve as an anchor to guide global currency movements

SINGAPORE: World Bank president Robert Zoellick has called on bickering G-20 nations to bring gold back into the global monetary system as an anchor to guide currency movements.

Ahead of a G-20 summit this week in Seoul, Zoellick wrote in yesterday’s Financial Times that an updated gold standard could contribute to retooling the world economy at a time of tensions over currencies and US monetary policy.

Zoellick said the world needed a new regime to succeed what he called the “Bretton Woods II” system of floating currencies, which has been in place since the fixed-rate currency system linked to gold broke down in 1971.

“Although textbooks may view gold as the old money, markets are using gold as an alternative monetary asset today,” he wrote in a commentary Financial Times commentary. The new system “is likely to need to involve the dollar, the euro, the yen, the pound and a renminbi (Chinese yuan) that moves towards internationalisation and then an open capital account,” he said.

“The system should also consider employing gold as an international reference point of market expectations about inflation, deflation and future currency values,” added Zoellick. His comments came amid worries of a so-called “currency war”. — AFP

As Ryan Avent of The Economist explains, Zoellick wasn’t actually calling for a return of the gold standard (emphasis added):

Fool's gold

I HAVE to say, I feel a little bad for Robert Zoellick. He has written a piece for the Financial Times that mostly consists of laying out the weaknesses of the global monetary system and proposing sensible reforms for it: things like an agenda of structural reforms to reduce imbalances, a general swearing off of currency market interventions, and an effort to move emerging markets toward floating exchange rates (with limited capital controls to avert destabilising surges of hot money). But no one is paying any attention to that. Instead, the FT has put Mr Zoellick's story on the front page with the banner headline, "Zoellick seeks gold standard debate". All because of this little bit, fifth in his plank of proposals:

“Fifth, the G20 should complement this growth recovery programme with a plan to build a co-operative monetary system that reflects emerging economic conditions. This new system is likely to need to involve the dollar, the euro, the yen, the pound and a renminbi that moves towards internationalisation and then an open capital account.

The system should also consider employing gold as an international reference point of market expectations about inflation, deflation and future currency values. Although textbooks may view gold as the old money, markets are using gold as an alternative monetary asset today.”

That's the extent of the gold talk. And honestly, I'm not even sure what's he calling for here. Not only is this point vague, it's also the least necessary of all the things he recommends; obviously markets are very good at revealing expectations of inflation and future currency values already.

Ryan has more analysis if you click on the link. Note the inconsistency in Zoellick’s remarks between the news article and the original comments that Ryan provides – change about the ordering of the sentences and something quite different emerges in economic terms.

I can just imagine the consternation at the World Bank today. Look for some clarification from them over the next couple of days.

Update: Brad De Long isn’t as kind on Zoellick – actually his reaction was pretty much my own until I read the Avent piece.