World Bank head calls for monetary system linked to gold

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World Bank head calls for monetary system linked to gold
9 November 2010

In the run-up to the G20 summit of leading economies, to be held Thursday and
Friday in Seoul, the president of the World Bank has published a column in the
Financial Times calling for a fundamental revamping of the global currency
system involving a lesser role for the US dollar and a modified gold standard.
The Financial Times underscored the significance of the column by making it the
subject of its front-page lead article on Monday.

In his column, World Bank chief Robert Zoellick, a former US Treasury official,
points to the crisis conditions prompting his proposal. He begins by observing:
“With talk of currency wars and disagreements over the US Federal Reserve’s
policy of quantitative easing, the summit of the Group of 20 leading economies
in Seoul this week is shaping up as the latest test of international cooperation.”

Here Zoellick is referring to the announcement by the US Federal Reserve last
week of a second round of “quantitative easing”—the printing of hundreds of
billions of dollars to buy US Treasury securities—and the sharp criticisms of
this move by major US trade competitors including China, Germany, South Africa
and Brazil. The US move is seen correctly as an intensification of a deliberate
policy to cheapen the dollar in order to make exports less expensive and foreign
imports more expensive.

The Obama administration is focusing its economic attack on China. It wants to
line up Europe, Japan, India and other Asian countries at the G20 summit behind
its demand that China allow its currency to appreciate more rapidly.

However, its cheap dollar policy is roiling relations with other
export-oriented, surplus nations, most notably Germany. In unusually bellicose
language, German Finance Minister Wolfgang Schäuble denounced the US in an
interview this week with Spiegel magazine. Saying the American “growth model” is
in “deep crisis,” he added, “The United States lived on borrowed money for too
long, inflating its financial sector and neglecting its small and mid-sized
industrial companies.”

He went on to declare: “The Fed’s decisions bring more uncertainty to the global
economy… It’s inconsistent for the Americans to accuse the Chinese of
manipulating exchange rates and then to artificially depress the dollar exchange
rate by printing money.”

The US—the world’s biggest debtor nation—is exploiting the privileged position
of the dollar as the primary world reserve and trading currency to drive up the
exchange rates of its rivals, in essence a trade war measure. It is unleashing a
flood of speculative capital into so-called emerging economies in Asia, Latin
America and Africa, pushing their currencies even higher and creating the danger
of speculative bubbles and inflation.

This aggressive and unilateralist policy on the part of the United States is
exacerbating global tensions and destabilizing the world monetary and financial
system. It is heightening the likelihood of a breakdown of international
relations and the outbreak of the type of uncontrolled currency and trade
warfare that characterized the Great Depression and led ultimately to World War II.

In his column, Zoellick urges the G20 to “build a cooperative monetary system
that reflects emerging economic conditions.” He continues: “This new system is
likely to need to involve the dollar, the euro, the yen, the pound and a
[Chinese] renminbi that moves towards internationalization and then an open
capital account.”

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

This is a tacit acknowledgment that the monetary system that has existed since
1971 and is rooted in the system established at the end of World War II—and
which is anchored by the US dollar—is no longer viable. It is furthermore an
admission that there is no other national currency that can replace the dollar
as the basis of global currency relations.

One expression of eroding confidence in the US dollar—and the monetary system
based on the dollar—is the spectacular surge in gold prices. On Monday, gold for
December delivery set new records, closing above $1,400 an ounce.

Zoellick argues that the “scope of changes since 1971” justifies the erection of
a new monetary system. However, he is silent on the most important of these
changes—the vast decline in the global economic position of the United States
and the decay of American capitalism.

The United States emerged from the wreckage of World War II as the unchallenged
global economic hegemon. Its industry dominated world markets. The US share of
world auto production in 1950 was 79 percent. In 1955, it accounted for nearly
40 percent of world steel production. At the same time, the vast bulk of the
world supply of gold was in Fort Knox.

The US engineered the postwar recovery of world capitalism, ensuring that the
monetary and trade architecture was favorable to its interests. Key to the
postwar recovery and expansion was the establishment of a new monetary system,
the Bretton Woods system, under which exchange rates were fixed and pegged to
the dollar. The dollar served as the world reserve and trading currency, but it
was backed by gold at the rate of $35 per ounce.

However, this arrangement contained a fundamental contradiction—the attempt to
use a national currency as a world currency. Even the massive economic wealth
and power of the United States could not override the basic contradiction
between the global economy and the nation-state system of capitalism.

By the late 1960s, the quantity of dollars held overseas far outstripped US gold
reserves, and the US was facing growing competition from resurgent Germany and
Japan. The Bretton Woods system collapsed in August of 1971 when the Nixon
administration, facing a run on the dollar, removed the gold backing from the US
currency.

That ushered in so-called Bretton Woods II, a system of floating exchange rates
tied to the dollar—an arrangement that was even more dependent on international
confidence in the strength of American capitalism. That confidence has
progressively eroded as the US has built up ever-greater debts and its
industrial base has withered, leaving its economy increasingly dependent on
financial speculation.

The financial crash of September 2008, which was centered on Wall Street, has
fatally undermined confidence in the dollar. The fact that the financial crisis
takes the form of a currency war and breakdown in the system of exchange
rates—what had been the pillar of the postwar recovery of world
capitalism—underscores the fact that the current crisis is not merely a
conjunctural downturn, but rather a systemic breakdown of the system.

Zoellick’s proposal for a return to some form of gold standard is both utopian
and reactionary. There is no possibility that the dramatic shift in economic
weight between the older imperialist powers—first and foremost, the US—and
emerging economies such as China and India can peacefully produce a new
international economic equilibrium based on a reduced role for the US dollar. As
in the twentieth century, so in the twenty first, the declining powers will not
willingly accept a lesser position and the struggle for control of markets, raw
materials and sources of cheap labor inevitably leads toward world war.

Were the proposal for a new gold standard to be carried out, moreover, it would
result in a catastrophic contraction of credit, plunging the world into a
depression exceeding that of the 1930s.

The breakdown of the currency system is an expression of an insoluble crisis of
the capitalist system that can be resolved in a progressive manner only through
the international revolutionary movement of the working class and the
establishment of world socialism.

Barry Grey

http://wsws.org/articles/2010/nov2010/pers-n09.shtml

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