Source: The Financial Times                  Date: 10 November, 2010

Leading economies should consider readopting a modified global gold standard to guide currency movements, argues the president of the World Bank. Writing in the Financial Times, Mr. Robert Zoellick, the bank’s president since 2007, says a successor is needed to what he calls the “Bretton Woods II” system of floating currencies that has held since the Bretton Woods fixed exchange rate regime broke down in 1971.

Mr. Zoellick calls for a system that “is likely to need to involve the dollar, the euro, the yen, the pound and a renminbi that moves towards internationalization and then an open capital account”. He adds: “The system should also consider employing gold as an international reference point of market expectations about inflation, deflation and future currency values.”

His views reflect disquiet with the international system, where persistent Chinese intervention to hold down the renminbi is blamed by the US and others for contributing to global current account imbalances and creating capital markets distortions.

Although there are occasional calls for a return to using gold as an anchor for currency values, most policymakers and economists regard the idea as liable to lead to overly tight monetary policy with growth and unemployment taking the brunt of economic shocks.

The original Bretton Woods system, instituted in 1945 and administered by the International Monetary Fund, the World Bank’s sister institution, comprised fixed but adjustable exchange rates linked to the value of gold. Controls to restrict destabilizing shifts of capital from one economy to another buttressed it. “The scope of the changes since 1971 certainly matches those between 1945 and 1971 that prompted the shift from Bretton Woods I to II,” Mr. Zoellick writes. “Although textbooks may view gold as the old money, markets are using gold as an alternative monetary asset today.”