Discusses how the gold standard might effectively revive, from the private sector.Global opposition to Fed Chairman Ben Bernanke's policy, World Bank President Robert Zoellick's "trial balloon" and statements by some of the new Republican Congressional caucus have caused a modest revival in consideration of the Gold Standard. In my view, the chances of its revival by official means in the next 10 years remain infinitesimal, but there is an increasing probability of private sector activity in that direction. Not only politically, the bombed-out Gold Standard stock may have reached bottom and be beginning a modest revival.
The Gold Standard did not disappear because it caused the Great Depression (it had only modest fingerprints on that disaster) nor because Maynard Keynes called gold a "barbarous relic." In reality, its demise had a much simpler cause: the rising rate of global population growth, which caused it to become damagingly deflationary...
One advantage of commodity-based money over fiat currency, however, is that it does not require official sanction to come into existence. Whereas paper money requires a central bank and a national credit rating behind it to attain credibility (and even with this sometimes fails to do so, as in Zimbabwe, Weimar Germany or Latin America for much of the 20th century), gold-based money can come into existence through private activity.
There is some evidence that this is happening. Austria's Raiffesen Zentralbank now offers its clients gold-based accounts, and other banks are likely to follow. The SWIFT international payments system now allows payment in gold, an essential element in a currency's infrastructure in today's markets. Governments worldwide are competing to depreciate their currencies (or, like the hapless EU, watching their currencies come under fire as the weaker members of their union get into difficulties). At some point, a major exporter with a good competitive position—if you asked me to guess, from China or Germany—could start invoicing its customers in gold.
When that happens, a very important barrier will have been crossed. Once gold-denominated trade paper comes into existence, it will form the nucleus of a short-term money market, in the same way as the eurodollar market for assets and liabilities outside the United States arose in Europe after 1957 or so. Within a few years, gold bonds will be issued—once a company has gold-denominated receivables, it will have a natural hedge for such financing, which will remain cheap in interest terms even after conventional currency interest rates rise. It has happened before, in the formation of the eurodollar and eurobond markets in 1957-65. This time, once gold invoicing happens, the gold money and bond markets are likely to spring up quite quickly.
Banks, even outside Austria and Switzerland, will quickly get up the curve of offering gold-denominated accounts once their corporate customers demand them. They will find that a substantial demand exists at the retail level also. Here, modern technology will be very helpful. An ordinary citizen will be able to use a gold-denominated account for day-to-day transactions by means of a debit card, without the need to carry round expensive sovereigns or double eagles. A payment of $9.50 for a sandwich will be satisfied by the debit card, which will pay dollars (say) to the sandwich bar while debiting the account about 0.007 ounces of gold, using that day's gold price.
The card holder will pay perhaps 1% extra for everything, to cover the cost of the gold/dollar exchange transactions; but on the other hand, since his cash holdings are in gold, he will very likely gain much more than that percentage in dollar terms each month. His wealth will be expressed as so many ounces of gold (or kilos, if he is European), but he will never need to hold physical gold at all—or any other currency, though probably he will get a few dollars from the bank's cash machine each month for expenditures for which his debit card is not accepted.
In this way, both corporate and individual users will be able to move their transactions and holdings to gold, with the banks adapting to meet their needs. The banks will remain regulated by national authorities, and will have to manage their gold assets, liabilities and capital in such a way as to avoid breaching the authorities' leverage ratios, based on the gold price at the end of each reporting period...
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