Why We're Not Returning to a Gold Standard

Last Updated Nov 10, 2010 5:15 PM EST

Sorry, gold bugs -- Robert Zoellick doesn't want a return to using the metal as a global currency standard, after all.

The World Bank president caused a stir last week when he suggested in an FT op-ed that the G20 nations should channel the spirit of Bretton Woods and consider using gold as an "international reference point of market expectations." Pundits promptly nominated him as the "stupidest man alive," arguing that dumping the U.S. dollar as the monetary standard would cause economic chaos.

Now Zoellick claims he was misinterpreted (My colleague Marion Maneker has a good rundown of what Zoellick was trying to say.) Speaking at a World Bank event on Wednesday in Singapore, Zoellick said he was merely referring to establishing a reserve system that uses gold in a basket of currencies:
I don't believe you can return to a fixed exchange rate system, and that is the gold standard.
Markets are already using gold as an alternative monetary asset because confidence is low... it is saying we have a problem that needs to be fixed.
That's wrong, too, says economist Brad Delong. Gold isn't even an alternative to fiat money, he notes, as anyone who's ever tried to buy a Big Mac with an American Eagle can tell you (I was told they couldn't make change). Rather, gold is that thing that you, and central banks, stash away for a rainy day. That's why gold prices rise when the economy tanks.

Countries also buy it as a form of protection against other states' habit of manipulating their currencies. Truth is, returning to the gold standard is impossible. For one thing, it's not practical in this day and age to ship tons of gold around the world to handle international payments. For another, as the WSJ notes, there isn't enough shiny stuff in the ground to accommodate the surge in demand from central banks, particularly in Asia, that such a shift would cause as nations adjusted their reserves.

Here's another problem:
Any country with investments in the United States could demand its gold at any moment. That's what happened in 1971. For years, the price of gold had been fixed at $35 an ounce. Finally, the British ambassador asked that $3 billion of the United Kingdom's investments be converted into gold. The United States soon went off the gold standard.
Re-pegging from the greenback to gold also could destabilize the already wobbly global economy, says the FT's Martin Wolf. That's because if bigger countries hit the skids, gold could pour into -- or out of -- other currencies, causing havoc. Wolf writes:
In short, we cannot and will not go back to the gold standard. As L.P. Hartley wrote, "The past is a foreign country: they do things differently there." We cannot live in the 19th century. It is foolish to pretend that we can.
Or as Emily Litella used to say, never mind:


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    Alain Sherter is an award-winning business journalist who has written for The Deal, MarketWatch and Thomson Financial Media.

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