http://www.sundayindependent.co.za/index.php?fArticleId=5728687
Sunday Independent
Returning to the gold standard is not a good idea
November 14, 2010 /Edition 1/
*Patrick Bond*
Should we take seriously the idea, promoted by World Bank president
Robert Zoellick, to partially root the global monetary system in gold?
Is gold, as he claims, an "elephant in the room" because it might play a
constructive role in reducing speculative turbulence and structural
imbalances - or instead, is the fast-rising gold price merely a
speculative bubble based on financial sector fears that authorities like
US Federal Reserve Chairman Ben Bernanke - who promised to push another
$600 billion into the anemic US economy last week - won't perform their
jobs in the ways bankers want?
"Bob Zoellick not only has a lot of historical perspective, but he also
understands the global dynamics better than most," remarked Jim O'Neill,
chairman of Goldman Sachs Asset Management.
The so-called "gold bugs" who promote the gold standard are also cheering.
Zoellick has a certain perspective, to be sure, fusing neoconservatism
and neoliberalism, but does he really understand the way the world works?
Zoellick's background includes:
# A role in destroying the US Savings&Loan industry while a leading
official at the US Treasury Deparment during the late 1980s;
# Connivance in dangerous 1990s financial deregulatory strategies while
serving as the second-ranking banker at top US housing lender FannieMae
(which effectively went bankrupt in 2008);
# Founding membership of the neocon Project for a New American Century
(now formally defunct but by the late 1990s a crucial think tank for
war-mongering against Iraq);
# Vote-counting duties in Florida on behalf of George W Bush in December 2000;
# Advisory relationships to Enron and Alliance Capital just before their
early 2000s demise;
# Wreckage of the World Trade Organisation at Cancun in 2003 while serving
as Bush's no-compromise trade representative;
# Mismanagement of US foreign policy (not to mention the deaths of over a
million Iraqis and Afghanis) as deputy to Condolleezza Rice at the US
State Department in 2005-06;
# International executive management at Goldman Sachs just before the
world financial crisis in 2006-07; and
# Running the World Bank since 2007, claiming to transform it into a Green
Bank and receptacle for climate finance, while in reality dramatically
increasing coal lending (its largest-ever loan was in April to finance
the world's fourth-largest coal-fired power plant, South Africa's own
Medupi).
How much more damage can Zoellick do? A former US financial official and
now a widely cited University of California professor, Brad de Long,
called him "the stupidest man in the world" when the Financial Times ran
Zoellick's arguments for rooting money in gold last Sunday.
It would be equally stupid for South African officials to entertain his
idea, as Pravin Gordhan appeared to do last week.
What happened the last time we suffered a gold standard, in the years
prior to 1932?
In 1929, South African bankers were extremely bullish about the local
economy. Their ratio of loans to deposits soared from 63 percent in 1926
to 85 percent in 1930, with half the increase in 1929. Land speculation
meant that "in some districts the value attributed to farm property
looked to be 50 percent too high," according to Standard Bank's
historian. (And today SA suffers the world's highest property bubble,
four times the size of the US bubble at its peak, says The Economist.)
To illustrate the strain between local and international financial
forces, Standard Bank was under a great deal of pressure to export funds
to its London head office. The Reserve Bank intervened, imposing a levy
for bank remittances and increasing the interest rate it charged local
banks. (Likewise today, SA's outflows of profits, dividends and interest
put us at the highest level among emerging markets, so high that last
year The Economist rated SA the world's riskiest of 17 peer economies.)
The October 1929 crash was initially felt mainly by the diamond
merchants, since rich New Yorkers' panic liquidation of their personal
assets flattened diamond prices. As the general price level of most
goods fell over the next few years, agricultural products bore the brunt.
When exports decline, one antidote is to devalue the currency. But when
a country is on the gold standard, the currency is valued according to
how much gold the country has in reserve. When such countries go deeply
into debt and import more than they export, gold stocks decline to make
payments.
Most major countries adopted the gold standard in the last quarter of
the 19th century, mainly because of pressure from commercial capitalists
to have convertible currency, to lubricate international trade. But
during the 1930s, too many countries simply couldn't afford to back
their currencies with gold, and in 1932, after Britain - still at the
centre of international finance - abandoned the gold standard, 32
countries followed, with only France, Belgium, Switzerland and the
Netherlands holding out until 1936.
As the world's leading gold producer at the time, South Africa had no
technical difficulties remaining on the standard. But because the value
of the currency remained high relative to other currencies, exports
suffered. At the same time, investors were shifting enormous amounts of
money out of South Africa. By the end of 1932, the tensions were
overwhelming and the country's social fabric was tearing, so mining
houses led the charge to abandon the gold standard and devalue the
currency.
After South Africa ditched the gold standard in 1932, the tie to the
currency was broken, and more gold could be mined without weighing down
the rest of the economy.
But in a world where G20 leaders welcome the presence of men like
Zoellick, as Jacob Zuma just did in Seoul, a much stronger push from
labour and social movements will be needed to dislodge blockages to
progress, including very zany ideas.
#
Bond is senior professor of development studies at UKZN and a visiting
scholar of the University of California-Berkeley Department of Geography
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