Follow the Yellow BRIC road?

Written by Ralph J. Benko
Thursday, May 26, 2011

The BRICS — Brazil, Russia, India, China and South Africa -- are a bloc of emerging economic powerhouses, most of whom have been aggressively critical of US dollar depreciation policy.  This writer long has believed that one of the major factors that will bring gold back into G20 consideration will be to "follow the yellow BRIC road."

In the past week, deeply respected monetary statesman and former deputy governor of the Reserve Bank of India S. S. Tarapore has published two articles, here and here, pointing out benefits of the classical gold standard. 

 

Recently, China 2011 Economy published an interview with China's central bank policymaker Zhou Qiren by staff reporter Ye Weikiang… who addressed the gold standard. 

While recognizing the political difficulties of re-establishing the gold standard, Dean Zhou observes of it: "Of course, this is an excellent monetary system.">

An excerpt:

Zhou Qiren:  Dean of Peking University's National School of Development and a member of the People's Bank of China Monetary Policy Committee.

Ye Weiqiang:  Staff reporter for Caixin.

>snip<

Proposals to go back to the gold standard are now reappearing.  Do you think this is feasible?

If the currency of each major country is bound to gold, financial headaches would of course be reduced.  Taking QE2 as an example, if this were the 1880s, the currencies of the major western countries would be measured in gold.  Unless the U.S.Treasury suddenly gained a large quantity of gold reserves, it would be impossible for (U.S. Federal Reserve Chairman Ben) Bernanke to print US$ 600 billion to purchase long-term debt.  If there is a commitment to a gold standard system, such as the Bretton Woods system in place until 1971, the Fed could not easily ease its monetary policy, because not only could each country with dollar holdings hold them accountable, they could also redeem their dollars for gold to see how much Uncle Sam's promise is worth.

A gold standard also would eliminate exchange rate wars.  Since all major currencies could be exchanged for gold or other currencies pegged to a currency that follows the gold standard, exchange rates would remain stable without anyone doing anything.  Where would exchange rate disputes come from?  In short, the gold standard would effectively prevent each country’s government from recklessly levying ‘inflation taxes’ domestically and passing troubles to others by manipulating currency exchange internationally.

Of course, this is an excellent monetary system.

However, the actual monetary system seems to be the lesser of two evils.  Namely, when the pain of unstable currencies and prices is greater, the monetary system moves toward the gold standard.  But when the pain of economic adjustment is greater, the monetary system moves toward a system that permits overprinting.  Globalization has connected the main economies, but the trouble with the world today is that economies are experiencing different sorts of pain at any one time.  Therefore, a return to the gold standard is extremely difficult. 

Dean Zhou?  Upon closer inspection the difficulty may prove more apparent than real.