Saturday, October 18, 2003
The Barbarous Relic returns?
Buttonwood writes this week about the declining confidence in the promises of central bankers. The backdrop is the APEC summit, where there is bound to be pressure on both China and Japan to revalue their currencies. It seems highly unlikely that China is about to heed the U.S.'s plea and I dont see why they should. At most, the renminbi will adopt a wider band on its peg. Japan, whose economy seems to be creeping out of stagnation, will be just as unwilling to do anything to rock the boat. Anyway, Buttonwood asks whether the falling allure of currencies might lead to a fallback on a Keynesian nightmare.
At some point, perhaps even the European Central Bank will wake up to the fact that the rising euro will keep the European economy close to recession. All of which is to suggest that none of the world’s major currencies is especially alluring; for one reason or another governments in all three might want them to fall. Of course, they cannot all fall against each other. They can, however, fall against something largely unloved by those under the age of 50, and famously dismissed by Keynes as a “barbarous relic”: gold.
Some historical context is provided.
It is only in very recent years that gold has lost its allure as a store of value. For centuries, the metal was virtually synonymous with money: the Egyptians were casting gold bars as money as long ago as 4000 BC. The gold standard’s heyday was from the 1870s to the 1930s (with a brief interruption in the first world war). Britain left the standard in 1931, a move pronounced as “the end of an epoch” by no less an authority than The Economist. America did the same in 1933. One by one, other rich countries followed suit. The gold standard was revived in a famous agreement in Bretton Woods, New Hampshire after the second world war, but only in America, which by then had three-quarters of the world’s gold stock. Although other currencies were fixed to the dollar, they were not fixed directly to gold. As other countries prospered, so America’s current-account deficit began to rise and its stock of gold began to dwindle. By 1971, inflationary pressures were driving up the real value of the dollar. In August of that year, President Richard Nixon took America off the gold standard once again.
Since then there has been a central-banking standard instead. The standard was set by Paul Volcker, the Federal Reserve chief who quashed inflation (which erodes the value of money) with draconian interest rates in 1980, and killed off the bull market in gold, which had climbed from $35 an ounce in 1968 to $850 an ounce in 1980. In its place came a bull market in government IOUs. Bonds, after all, pay interest, unlike gold.
At some point, perhaps even the European Central Bank will wake up to the fact that the rising euro will keep the European economy close to recession. All of which is to suggest that none of the world’s major currencies is especially alluring; for one reason or another governments in all three might want them to fall. Of course, they cannot all fall against each other. They can, however, fall against something largely unloved by those under the age of 50, and famously dismissed by Keynes as a “barbarous relic”: gold.
Some historical context is provided.
It is only in very recent years that gold has lost its allure as a store of value. For centuries, the metal was virtually synonymous with money: the Egyptians were casting gold bars as money as long ago as 4000 BC. The gold standard’s heyday was from the 1870s to the 1930s (with a brief interruption in the first world war). Britain left the standard in 1931, a move pronounced as “the end of an epoch” by no less an authority than The Economist. America did the same in 1933. One by one, other rich countries followed suit. The gold standard was revived in a famous agreement in Bretton Woods, New Hampshire after the second world war, but only in America, which by then had three-quarters of the world’s gold stock. Although other currencies were fixed to the dollar, they were not fixed directly to gold. As other countries prospered, so America’s current-account deficit began to rise and its stock of gold began to dwindle. By 1971, inflationary pressures were driving up the real value of the dollar. In August of that year, President Richard Nixon took America off the gold standard once again.
Since then there has been a central-banking standard instead. The standard was set by Paul Volcker, the Federal Reserve chief who quashed inflation (which erodes the value of money) with draconian interest rates in 1980, and killed off the bull market in gold, which had climbed from $35 an ounce in 1968 to $850 an ounce in 1980. In its place came a bull market in government IOUs. Bonds, after all, pay interest, unlike gold.
