R. Zoellick initiates the return of the global monetary system to an improved form of gold standard

Robert Zoellick, the president of the World Bank, has called on bickering G20 nations to bring gold back into the global monetary system as an anchor to guide currency movements.

Source: telegraph.co.uk/finance

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 internationalisation and then an open capital account. The system should also consider employing gold as an international reference point of market expectations about inflation, deflation and future currency values," Mr Zoellick said in a commentary piece for the Financial Times.

Robert Zoellick's plan involves five steps. As a first step the United States and China must come to an agreement on economic policy, which would include a process of increasing the yuan's exchange rate. After that, the world leading economies need to develop an agreement on the refusal of their central banks from foreign exchange intervention. The first two steps should remove the most painful problems of international monetary relations and prevent currency wars.

Subsequently the "Big Twenty" begins to create a new financial and economic system in the world. The third step, should become the education of the coordination system of exchange rates in developing countries. In the next stage the "Big Twenty" must develop a program to maintain stable growth in the global economy. Based on progress achieved during the first four stages of the reform, the fifth step would be the formation of a new monetary system, which will be based on a basket of five major currencies and gold. "Creating a new monetary architecture will take time, but this work should begin now," - said Mr. Zoellick.

Restoration of the gold standard in the global monetary system is called a new Bretton Woods system, which can replace the current one - Jamaica. The original version of the Bretton Woods system was established in 1944 as a result of agreements of the world leading powers aimed at ensuring financial stability after the Second World War. The main currency in international payments was set to be U.S. dollar and its exchange rate was fixed to gold ($35 per ounce). In addition, fixed exchange rates were established for the currencies of participating countries.

Economists started talking more seriously about the need for a new "gold standard" in the global financial crisis which began in 2007. This idea was particularly popular among the critics of neo-Keynesian model of economic regulation, embodied in the current economic policy of the US Federal Reserve System, which allows virtually unlimited issue of money to stimulate the growth of GDP. However, despite the fact that many well-known economists speak out from time to time in favor of the introduction of the gold standard, many believe that this will lead to excessively tight monetary policy, which will slow down the economic growth and increase unemployment.

It is expected that the currency wars to become one of the main topics at the G20 Summit in South Korea. Earlier, a meeting of "Big Twenty" finance ministers, which was held in late October, was not able to prevent the beginning of currency wars. There is no surprise that Robert Zoellick proposed his initiative shortly before the summit of the "Big Twenty" in Seoul, which, as expected, conflicts and discussions about the exchange rates of major world currencies will receive a new continuation...