China Nudges World Closer To New Gold Standard

http://blogs.forbes.com/greatspeculations/2011/03/30/china-nudges-world-closer-to-new-gold-standard/

China Nudges World Closer To New Gold Standard
Posted by Addison Wiggin,FORBES, Mar. 30 2011

On the night our documentary, I.O.U.S.A., made its nationwide premiere in August 2008, the film was followed up by a live panel discussion, broadcast via satellite. Our friend David Walker, the former U.S. comptroller general and “star” of the film, took part along with several other luminaries.

At one point, the question was asked: Might America’s trading partners one day sell off their U.S. Treasury holdings? Impossible, said Warren Buffett. In fact, he insisted, they couldn’t, because they’d need to convert it into some other currency, which would be little better than the dollar. No one else chimed in to challenge the assertion.

“Buffett’s answer assumes that there is no alternative,” author, friend and local Baltimore resident Bill Baker writes in his 2009 book, Endless Money: The Moral Hazards of Socialism, “because for generations, all the world’s currencies have been backed only by the promise that governments would accept them in payment of taxes. But that ignores a currency that has been used effectively by man for thousands of years: gold. China and other countries might exchange their U.S. dollars for it now.”

Indeed, China is quietly building its gold reserves. They totaled 600 metric tons in 2004. Then in April 2009 came an announcement they’d grown to 1,054 metric tons. And the buzz from Beijing is that the central bankers want to grow that stash another tenfold.

Meanwhile, China has trimmed its US Treasury holdings for three months in a row. The January total was $1.15 trillion – down 1.75% from October. These are the first steps toward what Baker sees as the “remonetization” of gold, coming soon to a country near you.

History is a pendulum. “Once gold and silver had been written into the Constitution,” Baker says, “no one might have thought that it would be replaced by paper within 60 years.” But the pendulum swung, the Union issuing its infamous greenbacks during the Civil War.

Then the pendulum swung back, the greenbacks’ critics were “able to successfully push for an agenda of gold resumption. But before the London Economic Conference of 1933, the world would be shocked by Roosevelt’s rejection of the gold standard.” The pendulum swung again.

Now, “a series of crises such as was the case in Rome might ultimately bring the pendulum back toward gold,” Baker writes.

In other words, we’re approaching the end of the great dollar standard we wrote about in The Demise of the Dollar. The only world anyone younger than 40 has ever known, in which all the world’s currencies float freely against each other, is nearly over.

Financial calamities are becoming increasingly likely in this overly indebted world of ours and the death of paper currencies is becoming increasingly certain. The best time to prepare is ahead of time.
for The Daily Reckoning

When Gold Becomes Money Again by Addison Wiggin originally appeared in the Daily Reckoning.