Maybe the New York Times is a more worried about the prospect of inflation than Paul Krugman likes to let on. Maybe not. Either way it’s out with a long op-ed piece raising the question of whether the Communist Chinese could eventually make the kind of move America made at Bretton Woods in 1944, when it established the dollar as a specified amount of gold and, as the Times op ed piece put it, “confirmed the central position of the United States in the international monetary system.”
The dispatch, under the headline “A Chinese Gold Standard?”, is by Kwasi Kwarteng, a member of the British parliament who has a book just out on the 500 year history of empires and debt. The book, in the view of James Grant, writing in the Wall Street Journal, is exasperating in the author’s refusal to “render historical judgment.” That would be in the contest between real money — gold — an the fiat currencies on which the world has been relying, if that is the word, since the collapse of Bretton Woods under the strain of guns and butter.
Mr. Kwarteng’s cable in the Times is a bit more forthcoming in its suggestion that the Red Chinese could, by expanding their gold holdings and international reserves, end up making their own currency an anchor of the international system. He suggests there is a possibility of the Chinese reds replacing the American dollar the way the dollar once replaced the British pound. It, after all, had been backed by gold and served as the world’s reserve currency through most of 19th century.
Mr. Kwarteng notes that America is “$17.6 trillion in debt owed to the public, and large trade deficits are the norm.” Yet, he reckons — wrongly in our estimation — that “there is no scope for revisiting the international monetary system, despite great dissatisfaction by countries like China and the Persian Gulf states, which hold large foreign currency reserves.” He does concede that “Americans themselves question the security of the dollar when their country faces such large trade and budget deficits.”
Instead, Mr. Kwarteng looks to the China, with its nearly $4 trillion in reserves “accumulated through its mercantilist trade policies” that “give it plenty of ammunition to claim leadership in the creation of a new monetary order.” He asks: “Could China someday peg its currency to gold, as Britain did in 1821? China has the reserves to do this, and it could have the political will, if the dollar proved to be unreliable as a store of value in the future.” He suggests that there could be a renminbi pegged to gold within a generation.
“With a balanced budget and a gold-backed currency, China’s economy could be even more formidable than it is today,” writes Mr. Kwarteng. “Such a move would truly mark its return as the ‘Middle Kingdom.’” He also suggests that such a scenario “would, in many ways, be a more secure basis for an international monetary regime system than the system of floating exchange rates that Nixon inadvertently created in 1971, one that forever overturned the Bretton Woods order.”
The piece in the Times marks the second time in recent weeks that we’ve heard recognition that we are being failed by our system of fiat money and floating rates. The more important was the speech in May by the former chairman of the Federal Reserve, Paul Volcker, to the Bretton Woods Committee in Washington. “By now,” Mr. Volcker said, “I think we can agree that the absence of an official, rules-based, cooperatively managed monetary system has not been a great success.” No doubt that history will render her judgment in her own good time.