Wistfulness and nostalgia are not the preserve of revisionists' alone. Even down-to-earth persons not given to cloying sentimentality indulge and revel in them from time to time.

The issue of international reserve currency has been agitating the minds of economists and governments alike for several decades now, especially after the 2008 financial crisis that rocked the world and called into question more than ever before the wisdom of setting store by and large by a single currency, the US dollar which ironically held its own even as the US economy went into a tailspin.

How the US hooked the world to its currency in 1944 on the back of the formation of the Breton Wood twins, the World Bank and the IMF, after the Second World War is sufficiently well-known and does not bear a repetition. It dangled the bait of an ounce of gold for every $35 in what was arguably the best but deceptive manifestation of gold exchange standard.

The offer was too good to last and the US predictably reneged on it in 1971 when the first oil shock shook the world and made gold the safest haven even as the IMF members grudgingly marvelled starry-eyed at its gumption. The international financial community hooked to the US dollar has been willy-nilly persisting with it, thanks to its first mover advantage and the TINA (there is no other alternative) factor.

The TINA factor

The TINA factor which is a sad admission of helplessness is in evidence in many walks of life, including politics where failed parties continue to win for want of emergence of a credible alternative. Much the same is happening in the more rarefied and less decipherable world of currencies.

The Euro has clearly flattered to deceive and a currency tentatively named oil was still-born when oil exporting nations such as Russia, Venezuela and Iran developed cold feet in the last minute. The Chinese currency Yuan remains in shell due to the reluctance of the Chinese government to float it in the international market for the fear of unveiling its true value that would hurt its exports, the mainstay of its economy.

In the event, the bulk of the international payments be they for trade or investment or travel purposes is still being done in the US dollar and provide a crutch to the US economy and its currency.

Even those keen on breaking free of the US dollar by entering into barter deals, which reportedly accounts for more than a fourth of the international trade according to the WTO, cannot completely wish away the US dollar because while it may not be used by them as a medium of settlement, it still remains the medium of valuation of what they bring to the table.

Pining for gold standard

There are quite a few economists and policy wonks that are pining for the return of the gold standard this time round on a fuller and all-encompassing scale to address the problem of a true international reserve currency.

It is true that if all individual currencies of the world are unified and underwritten by gold, there may be a semblance of order in the financial world and it could mark the end of the supremacy of a single currency because at the end of the day all currencies would be linked to the mystique yellow metal. In a way what they have mind are the advantages of standardisation a la the IAS (international accounting standards).

Accounts, it is said, must speak in a single language and should not be held hostage to and clouded by the practices and laws of different countries. Accounting standards facilitate comparison of accounts. But it is one thing to standardise accounts, but quite another to standardise currencies.

Depleting reserves

It is well-known that the gold reserves like oil reserves are fast depleting and fresh discoveries are hard to come by. Many gold producers are scraping the bottom of their mines, so to speak and the Indian government has long given up on its only gold mine, the Kolar Gold Field. The central banks of the developed world led by the US are sitting on a pile of gold. In the event if countries of the world are mandated to back their currencies with gold, it would not only give an undue advantage to these nations but trigger a mad scramble for gold, thus making the entire exercise counter-productive.

Standardisation should not introduce newer and greater rigidities, uncertainties and inequities. Developing countries instead of pursuing their developmental agendas would be driven to pursuing the mirage of gold. Besides, the oil exporting countries, for example, can turn around and ask with righteous indignation what is wrong with backing their currencies with oil just as Australia can plump for the backing of its currency with coal and copper.

No straitjacketing

The point is each country has it own unique advantage and it would be wrong to straightjacket the currency issue into a gold case. But then this is not to rubbish the case for providing a solid backing for a currency. Let each country be made accountable for its currency through the backing of whatever it can offer by way of exchange - let it be gold, copper, oil or coal.

Of course this will put service economies such as the US and India at a severe disadvantage. The US dollar is holding sway despite the US government providing no concrete guarantees except perhaps through its technological and military might.

The point is service economies may willy-nilly have to go for a gold rush if the world reverts to some credible standard, but gold should not be thrust on the world as the only credible guarantee.

In such a denouement, the Indian government would have to gird its loins to bring into the mainstream the mind-boggling quantities of gold and gold ornaments piled up by its people over the years estimated at 15,000 tonnes most of which either languish in bank lockers or dingy lofts.

(The author is a Delhi-based chartered accountant.)

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