The Global Economy in Turbulent Times

CHAPTER 62 So, the Gold Bug Still Bugs You¹

Keynes called it a “barbaric relic” in 1924. Scarce, attractive, malleable, and immune to corrosion—gold used to be ideal money before the advent of modern paper money. Today, just like diamonds, gold is also a girl’s best friend. In Asia, it is the masses’ darling. Most Asians are showered with gold when they are born; gold is figuratively given away at every Chinese New Year; Asians are blessed with it when they get married; and even when they die—gold paper is burnt to accompany them to wherever. Money aside, gold plays an important part in the social lives of most people in Asia.

Monetary Gold

Britain went off the gold standard in September 1931 in the midst of the Great Depression (1929–1932). Two groups of European “gold bloc” nations (including Germany and France) held on, and did not abandon the gold link until 1936. By then, rigid adherence to the gold standard had made the Great Depression worse. Between 1934 and 1940, some US$16 billion of gold flowed into the United States, giving it three-quarters of global official gold holdings. By the end of World War II (WWII), it was clear that the US dollar was as good as gold. Indeed, it was even better since US$ holdings earned a regular return.

After WWII, the Bretton Woods system was put into place. The original system worked well for 25 years mainly because the US dollar was convertible into gold at a fixed price (US$35 an ounce). The International Monetary Fund (IMF) served ...