By Paramjeet Berwal
Paramjeet Berwal is a visiting lecturer at the University of Georgia.
News channel RT, on 14th March 2018, reported on Hungary becoming the most recent of the European Union (EU) countries deciding to get its gold back home. The Central Bank of Hungary announced it on 6th March 2018, on its website. The bank indicates that this is in line with the international trend and is aimed at fostering confidence in the countrys economy. The central banks in countries like Germany, Austria, and the Netherlands have already been on this track. However, there is much more to it than it seems.
Reasons for the move
The world is still struggling to get out of the economic crisis that began in 2008 and re-escalated in 2014. The banks failed, and it reflected on the whole economic structure. The Nixon shock of 15th August 1971 ended the Bretton Woods System, forbidding convertibility of the US dollar into gold. The currencies, prior to the shock, were pegged to the dollar that was pegged to gold for a fixed exchange rate. The world economies have since been using multiple forms of currency exchange arrangements, according to International Monetary Fund.
However, no country is allowed to peg their currency to gold. Therefore, the emergence of Fiat currency, which, though asserted as being more stable, is nothing more than a promise by the central bank or by the government to pay to the currency-holder, has led to worsening of the situation. It gave more power to central and other commercial banks to fiddle around, creating money out of nothing by using what is called ‘Fractional-reserve banking.’
Michael McLeay, Amar Radia and Ryland Thomas of the Bank of Englands Monetary Analysis Directorate, in the Bank’s 2014 Quarterly Bulletin (Q1), published a paper titled Money Creation in Modern Economy, highlighting how money is created by banks.
Battling volatility
In view of the aforementioned, if the banking system goes down for any reason including non-payment of mortgages ,especially when the contemporary global economy is primarily a debt-based economy, the holder of those currency notes cannot approach the central bank that issued them or the government that promised to pay its value, because there is nothing that that the currency is pegged to. Ultimately, more of taxpayers money is pumped into the system with the hope of reviving the economy.
The current situation in Europe and, perhaps, in countries all over the world, is very volatile. Therefore, the central banks around the globe are considering having gold reserves to where they belong because, as argued, it affords some kind of pseudo-confidence in the economy at the domestic level. This is because, as noted above, the Fiat currency is merely a promise that roots in nothing and gold, on the other hand, being a rare precious metal, can be easily traded on foreign currency exchanges.
In case of a crisis, gold prices shoot up as the demand increases on currency exchanges and the supply remains limited. Therefore, relying on this theory, the fact that a country possesses enough gold reserves is likely to make an economy more positive and keep it going. Aptly expressed by the Bundesbank, gold is worth the most when it doesn’t have to be turned into cash.”
Future prospects
How much truth this proposition holds will be tested when the time comes. Regardless, a country resorts to such actions only when there are reasonable speculations backed by relatively concrete evidence, of that economy heading south. If one refers to the Winter 2018 Interim Economic Forecast: A solid and lasting expansion, things do not look so gloomy. However, this is what was being said about the booming housing market in the US that ultimately collapsed. Let us hope that Europe learns from past and ushers in real reforms to bring the economy of a new track and not back on the same track.