Chapter 2: Findings and Analysis- 2.1 Introduction - National Reserve Currency

2.1     Introduction

“Gold is the money of kings, silver is the money of gentlemen, barter is the money of peasants – but debt is the money of slaves” - Norm Franz, Money and Wealth in the New Millennium.

On the 31st of December 2010, Gold ended the year at $1,420 an ounce: up over 30% on the year, and the 10th year in succession in which it grew in dollar terms. Since 1971, when Richard Nixon unilaterally took the world off the Bretton Woods gold standard, gold has appreciated from its then price of $35 per ounce to its current level, signaling a 3,950 percent appreciation in gold – or to be more accurate – depreciation in the US Dollar. Gold was the leading investment class in 2010, and the only one to appreciate in every year since 2000. But this paper is not about relative investment asset performance; it is about gold as currency. It is about the perpetual wasting, debasement of the world’s fiat paper based currencies and whether there is a viable alternative. With economic growth anaemic at best in the developed world and facing new bouts of currency wars, as countries try successive rounds of currency devaluation via money printing, many are now questioning whether gold can again be a cornerstone of the worlds monetary system.

The head of the World Bank, Robert Zoellick in November 2010 in a Financial Times article reignited the debate by urging world leaders to consider reintroducing a gold standard to control currency movements. He argued that the world’s largest economies needed to build a more cooperative monetary system, which he claimed would increase investor confidence and stimulate future economic growth:

“The G20 should complement this growth recovery program with a plan to build a co-operative monetary system that reflects emerging economic conditions. This new system 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. The system should also consider employing gold as an international reference point of market expectations about inflation, deflation and future currency values. Although textbooks may view gold as the old money, markets are using gold as an alternative monetary asset today.” 

Zoellick’s comments predictably elicited a storm of protest from financial and banking interests. However, the current system remains and continues to fail. The US government’s use of Quantitative Easing (which dramatically increases money supply) has also been widely criticized. Chinese Premier Hu Jintao on the eve of his visit to the US in mid January quite aggressively asserted:  “The liquidity of the US$ should be kept at a reasonable and stable level”.

Hu Jintao also hinted at the need for a radical overhaul in the fiat monetary system when he said on the same trip:  “the current international currency system is the product of the past”.

Mr Hu was merely reiterating the fact that the world’s de facto currency (the US$) continues to depreciate rapidly and that major creditor nations such as China will not continue to bankroll US deficits. The paper based fiat system enables the US to wantonly print dollars as and when it feels fit. As the key global currency, this has dramatic effects on the world economy, with gnawing inflation and a persistent devaluation in the dollar (and indeed the other key world paper currencies).

As the immediate impacts of the financial crisis are digested, and currency devaluation emerges as perhaps the final tool to engender recovery, it is time to consider again alternatives to this unstable fiat paper regime. With the thorough discrediting of much of the worlds banking system throughout the recent crisis, there is an opportunity to re-examine the monetary pillars of western banking – including credit creation through fiat currencies that are wholly devoid of any asset backing. 

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