Currency Wars_ The Making of the Next Global Crisis - James Rickards [128]
The implications of a new gold standard for the international monetary system would need to be addressed as well. The history of CWI and CWII is that international gold standards survive only until one member of the system suffers enough economic distress, usually because of excessive debt, that it decides to seek unilateral advantage against its trading partners by breaking with gold and devaluing its currency. One solution to this pattern of unilateral breakouts would be to create a gold-backed global currency of the kind suggested by Keynes at Bretton Woods. Perhaps the name Keynes suggested, the bancor, could be revived. Bancors would not be inflatable fiat money like today’s SDRs but true money backed by gold. The bancor could be designated as the sole currency eligible to be used for international trade and the settlement of balance of payments. Domestic currencies would be pegged to the bancor, used for internal transactions and could be devalued against the bancor only with the consent of the IMF. This would make unilateral or disorderly devaluation, and therefore currency wars, impossible.
The issues involved in reestablishing a gold standard with enough flexibility to accommodate modern central banking practices deserve intensive study rather than disparagement. A technical institute created by the U.S. White House and Congress, or perhaps the G20, could be staffed with experts and tasked with developing a workable gold standard for implementation over a five-year horizon. This institute would address exactly the questions posed above with special attention paid to the appropriate price peg in order to avoid the mistakes of the 1920s.
Based on U.S. money supply and the size of the U.S. gold hoard, and using the 40 percent coverage ratio criteria, the price of gold would come out to approximately $3,500 per ounce. Given the loss of confidence by citizens in central banks and the continual experience of debasement by those banks, however, it seems likely that a broader money supply definition and higher coverage ratio might be required to secure confidence in a new gold standard. Conducting this exercise on a global basis would require even higher prices, because major economies such as China possess paper money supplies much larger than the United States and far less gold. The matter deserves extensive research, yet based on an expected need to restore confidence on a global basis, an approximate price of $7,500 per ounce would seem likely. To some observers, this may appear to be a huge change in the value of the dollar; however, the change has already occurred in substance. It simply has not been recognized by markets, central banks or economists.
The mere announcement of such an effort might have an immediate beneficial and stabilizing impact on the global economy, because markets would begin to price in future stability much as markets priced in European currency convergence years before the euro was launched. Once the appropriate price level was determined, it could be announced in advance and open market operations could commence immediately to stabilize currencies at the new gold equivalent. Finally, the currencies themselves could become pegged to gold, or a new global currency backed by gold could be launched with other currencies pegged to it. At that point the world’s energies and creativity could be redirected from exploitation through fiat money manipulation toward technology, productivity