The time for the resumption of a gold-standard currency or for the adoption of some other-standard currency is now fast arriving. Indeed, the G20 agenda planners are already talking about the latter as the chief item for . . . their next summit. It may be, though, that events will move too quickly for politicians or their advisory economists and that the market will decide. If the latter, then it will be gold as standard. It’s not the perfect material—nothing is—but it has served all previous civilizations well enough for thousands of years until a century ago and there’s no logical reason why it shouldn’t be so again.
We now have a race between the current rise in the price of gold and the rationality of the 100 or so decision-making minds at the World Bank, the International Monetary Authority, the Bank for International Settlements and the three central banks that matter—the US Federal Reserve, the People’s Bank of China and the European Central Bank—as they bring pressure to bear on the next G20 summiteers.
The reason is that in only in the last two or three weeks has President Obama finally woken up to the fact that government spending has to diminish and that America has finally got to stop printing dollars—the predominant currency of world trade—in order to avoid world-wide financial chaos. If anything, it will be worse than the credit-crunch of late 2007 when, during one week-end, cash machines were within hours of being empty and when pension and salary payments would have been stuck within banks that could no longer operate. People forget these things so quickly.
In the July before the credit-crunch, the credit ratings firm, Standard & Poor, had said it may cut its ratings of $12 billion of US subprime debt. This was only a small part of the total hidden chaos in the American and European financial scene. Yesterday (and this would have leaked to Obama days or weeks ago) Standard & Poor have pronounced a total verdict on America. Unless America repaired itself—and the dollar—within the next two years, then it would reduce America’s AAA rating. America would join Greece, Iceland, and Portugal as a basket-case country.
Because it emerged so powerfully after World War II and has been printing dollars—increasingly so ever since—America was a country too big to fail. At the expense of its own factory workers, America was able to unleash its depreciating currency on the rest of the world. But no longer. America is a country like all other countries after all. It still has to balance its budget from year to year.
As a necessary partner to budget-balancing, the American dollar has got to be locked onto a stable standard. But this will have to be done, not within two years, but within weeks. Investors are now already fleeing American Treasury bonds and buying gold and other safe assets. Unless a G20 summit decides to lock the dollar to a standard (perhaps a package of commodity prices, or perhaps gold) then what will happen is that the price of gold will rise even faster than it has been doing. Eleven years ago when investors started to have collywobbles about the dollar, the price of gold started moving upwards, not in a bubble but in a steady, largely smooth, exponential curve. It was then rising at about 10% per annum but has been gently accelerating ever since to about 35% per annum now.
And, if G20 rationality fails, what will then happen? When gold reaches a particular price level, America will be forced to lock the dollar to a particular weight of gold such that the gold in Fort Knox and two other depots (supposedly 8,000 tonnes in total) will neutralize its debts or at least a substantial proportion of them. If it doesn’t do so then it’s in great danger of a consortium of other countries, such as China, Russia, Germany, Brazil, Finland, Belgium (all hitherto passably successful as economies) locking their individual currencies against gold at prices agreed between them (but from then onwards freely exchangeable with one another). America, Japan, the UK and other deeply-indebted countries will have to follow by force majeure.
Loss of face? I’ll say! But America would still survive. This sort of event has happened before. In the 1940s and 1950s even the UK had to eat humble pie by seeing the UK pound dethroned from its world-wide trading supremacy. We still survived, mainly by the quality of our scientific research. America now has the best and the most of the world’s scientific research. So it will survive, too.
All that remains is that America comes to its senses. If it does so and eats humble pie at the next one or two G20 summits then fine. If it doesn’t do so then some sort of consortium as mentioned above will allow, and/or private investors will force, the price of gold to rise so high that America will be forced into a stable dollar for good and all —whatever its economic condition at the time.