Antonio Fazio: The relationships between currencies and gold
Speech by Mr. Antonio Fazio, Governor of the Bank of Italy, at the World Gold Council International
Conference “The Euro, the Dollar and Gold”, held in Rome on 17 November 2000.
“If a gold standard had never existed, it might be necessary to invent something of the kind”. This quotation from a monograph by Dennis Robertson (Money, 1928, p 122) refers to one of the positive aspects of the gold standard: that of shielding central bankers from pressures to increase the money supply. After the First World War the return to gold was in fact the overriding objective of economic policymakers, in order to ensure monetary stability.
The economic disequilibria produced by the war were so pronounced, however, that they made it hard to re-establish the gold standard. The cost, in terms of welfare, imposed by inflation, rising public debt and war reparations was so high that it prevented the rapid return to gold.
The Genoa conference of April 1922 laid the foundations for an important innovation: the creation of the gold exchange standard, under which gold was flanked by convertible currencies and central banks were granted greater autonomy; this was to be used to stabilize the value of gold, through international cooperation. However, the new system did not enjoy the same credibility as the earlier regime and, at the same time, failed to leave the monetary authorities sufficient room for manoeuvre. Culturally still under the influence of the gold standard, the monetary authorities were in any case little inclined to cooperate and tended to accumulate gold reserves, thereby exerting powerful deflationary pressure on the economy.
The monetary disorder of the thirties created the need for a new reform, which was implemented after the Second World War with the Bretton Woods agreements.
The suspension of the dollar’s convertibility on 15 August 1971 officially cut the link between legal tender and gold - an epochal change after more than 2,500 years during which money had always been based explicitly or implicitly on a precious metal, prevalently gold.
The abandonment of a monetary system hinging directly or indirectly on gold was a consequence of the severe economic disequilibria that developed between the two world wars. The advances made in monetary theory also exerted a powerful influence.
Ricardo provides us with a clear indication of the main objective of the gold standard: “To secure the public against any other variations in the value of currency than those to which the standard itself is subject, and, at the same time, to carry on the circulation with a medium the least expensive…”. He also noted that: “Experience, however, shews, that neither a State nor a Bank ever had the unrestricted power of issuing paper money, without abusing that power: in all States, therefore, the issue of paper money ought to be under some check and controul; and none seems so proper for that purpose, as that of subjecting the issuers of paper money to the obligation of paying their notes, either in gold coin or bullion.” The same concepts are to be found some hundred years later in Irving Fisher..."
"...In practice the system turned into a fixed-rate dollar standard. The importance attributed to domestic targets in the economic policy of the United States undermined the coherence and operation of the system, thereby preparing the ground for the abandonment of the link with gold and the move to floating exchange rates...."
"...The process up to now has followed a virtuous course, without excessive inflationary pressures thanks to heightened competition and productivity gains in the United States. Its Achilles’ heel is the rise in the prices of raw materials and energy products...."
[Mrt: The conclusion in the document]
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