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Analysis
Fool’s gold? - Zoellick’s comments on monetary reform draw cheers and jeers

Fool’s gold? - Zoellick’s comments on monetary reform draw cheers and jeers

World Bank chief blows up a tempest by saying nothing very new

by Darrell Delamaide

Thu 11 Nov 2010

World Bank president Robert Zoellick has blown up a veritable tempest with a newspaper article suggesting that gold might have a role to play in a new monetary order.

He did not, a World Bank spokesman emphasises, use the words ‘gold’ and ‘standard’ next to each other. That was the work of the headline writers at the Financial Times, where Zoellick’s article appeared, who emblazoned ‘Zoellick seeks gold standard debate’ across the front page.

The reaction from the blogosphere was swift and vehement. University of California-Berkeley professor Brad DeLong said Zoellick, a former aide in the US Treasury and State Department, ‘may be the stupidest man alive.’ To which Nobel Prize-winning economist Paul Krugman added, ‘That’s much too kind.’ Post-Keynesian guru Bill Mitchell, the Australian economist, said Zoellick was having a ‘brain attack.’

‘The last thing that the world economy needs right now is another source of deflation in a financial crisis,’ DeLong blogged. ‘And attaching the world economy’s price level to an anchor that central banks cannot augment at need is another source of deflation – we learned that in the fifteen years after World War I.’

Zoellick had his defenders. The Wall Street Journal thundered that no one since Ronald Reagan and Jack Kemp have understood the importance of stable money. Of course, the conservative editorialists at the Journal gave Zoellick the dubious distinction of being lumped together with Sarah Palin as a pair that ‘roiled the global monetary debate in complementary and timely fashion.’ (Palin attacked Federal Reserve chairman Ben Bernanke’s policy of quantitative easing as ‘pump priming’ and inflationary.)

The fact is that Zoellick laid out a five-point agenda for world economic recovery, including a number of trade and development measures that few would argue with. As his fifth point, he suggested a restructuring of the monetary order to involve all major world currencies – hardly different from similar proposals that surface regularly.

Then came what the Journal called Zoellick’s ‘sound-money kicker’: ‘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.’

Now Zoellick is probably not the stupidest man alive. He graduated from Harvard Law School magna cum laude, held responsible positions at Treasury and State, was sherpa at G7 economic summits for the first President Bush, and one of the Vulcans who advised the second President Bush on economic policy during his campaign for the presidency.

The conservative New York Sun found that Zoellick was right in line with Alan Greenspan, the former Fed chairman, who reportedly told the Council on Foreign Relations in September that ‘Fiat money has no place to go but gold.’

Zoellick echoed this when he clarified his op-ed remarks. ‘Gold has become a reference point because holders of money see weak or uncertain growth prospects in all currencies other than the renminbi, and the renminbi is not free for exchange,’ he said at a press conference in Singapore while on his way to the G20 summit in Seoul. ‘So in relative terms, gold is appealing to people who ask: “Where should I put my money?”’

To be perfectly clear, he added: ‘This is not the same as a gold standard.’

Without discussing any nuances, some investors clearly thought Zoellick was a genius and pushed the price of gold above $1,400 an ounce for the first time. But European Central Bank president Jean-Claude Trichet pooh-poohed the whole notion, saying central bankers meeting in Basel didn’t even discuss it.

‘We did not discuss the gold standard,’ Trichet said. ‘In my memory such an idea was mentioned a long time ago by Jim Baker when he was a Secretary of Treasury in the 1980s.’

Guess who was counsellor to Secretary Baker back in those days? Robert Zoellick! So there really is nothing new under the sun.

Robert Skidelsky, the British economic historian and biographer of Keynes, confirmed this when he gave ‘three cheers’ to Zoellick. John Maynard Keynes, even though he famously called gold ‘a barbarous relic,’ actually wanted to use it as a reference point, too, in the post-war monetary system, Skidelsky wrote this week. Keynes had a nuanced view of gold, Skidelsky said, ‘which he thought would be useful as a constitutional monarch but disastrous as a despot.’

Darrell Delamaide is a member of the OMFIF Board of Contributing Editors.

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