Gold and silver should be at the heart of a new global reserve currency

Since the Chinese put a new global reserve currency on the table at the G20 summit which created $250 billion in new IMF Special Drawing Rights, discussion of the new currency has increased, and the logic of putting precious metals into this basket is clear.

Gold and silver have been used as money for several millennium because even the most artful alchemist has failed to find a way to manufacture precious metals. Over recent centuries, fiat or paper money collapses have always been followed by a reversion to gold and silver. Why should it be different this time?

Money supply inflation

Global governments are expanding money supply as though there is no tomorrow. Only yesterday, the British government unveiled plans to borrow more in the next two years than in the previous 300 years of its history, including two world wars and the creation of the welfare state.

It is clear that a day of reckoning is coming for the fiat or paper currencies of the world whose governments have lost all reason in their desperate pursuit of a magic bullet to solve the global financial crisis. Printing money is the last resort of bankrupt governments.

If we go back to the South Sea Bubble of the early 1700s in France, there is the first example of modern times, with paper replacing gold until a mammoth inflation sent the government scurrying back to precious metals. The revolution came later.

Or in ancient times, the Roman emperor Nero debased the currency and so did his successors and with it fell the Roman Empire.

But an orderly exchange of fiat currency for precious metals is perfectly possible, and the Chinese proposals for a new reserve currency have suggested using the commodities model suggested by Keynes in the 30s.

Stiglitz support

Nobel Prize winner Joseph Stiglitz is the latest economist to back a new global reserve currency, although he does not detail a role for gold and silver.

However, precious metals should be at the heart of a new global currency, partly to give it credibility as something really different to combining several paper currencies, and also because of the discipline of a fixed supply of precious metals that will stop governments from devaluing and inflating away people’s money.

Will this happen as a result of informed debate? Probably not. The historical precedent is for a crisis followed by a reversion to gold and silver at prices far higher than those seen before the crisis