World Bank President Robert Zoellick has called on bickering G20 nations to bring gold back into the global monetary system as an anchor to guide currency movements.
Gold underpinned exchange rates between 1946 and 1971
In a commentary published in Monday's Financial Times, World Bank President Robert Zoellick wrote that an updated gold standard could help retool the world economy amid tensions over currencies and the United States' monetary policy.
Looking ahead to this week's meeting of the Group of 20 (G20) nations in Seoul, the former US trade representative said the world needed a new regime to succeed 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 the gold standard helped guard against inflation, it was abandoned because it did not allow for the flexible monetary policy many economists believe is essential in counteracting economic shocks.
"Although textbooks may view gold as the old money, markets are using gold as an alternative monetary asset today," Zoellick wrote.
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 internationalization 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."
Zoellick says the world needs to rethink currency exchange rates
Zoellick's comments came amid fears of a so-called "currency war" that would see countries jostle for trade advantage by massaging their exchange rates lower.
The United States has led accusations that China cheats in world trade by artificially weakening its currency.
But China and Germany, both major exporters, have complained that Washington's policy of quantitative easing - effectively printing money - is weakening the dollar and harming emerging markets' competitiveness.
Investors are pumping dollars into emerging markets in search of higher yields, and the potentially destabilizing impact of this, along with big current account deficits and China's reluctance to let the yuan appreciate faster, are set to dominate the G20 summit on Thursday and Friday.
France, which takes over the G20 chair after this week's summit, says it plans to work on a new international monetary system to bring greater currency stability.
Beijing's central bank chief has suggested an alternative monetary system based on using the International Monetary Fund's Special Drawing Rights, a notional unit of value based on a basket of major currencies, instead of the dollar as the sole global reserve currency.
Zoellick said a new monetary system would take time to develop and should be part of a package approach including possible changes in International Monetary Fund rules to review capital as well as current account policies, and linking IMF monetary assessments to World Trade Organization obligations.
He also called on the G20 to forge structural reforms, including the promotion of domestic demand in China and the reduction of debt in the United States.
Author: Sam Edmonds (AFP, Reuters)
Editor: Martin Kuebler