Good as Gold?

You'll learn next term about the history of monetary arrangements that the industrialised world has dabbled with over the years.

Most tend to be abandoned in perceived failure - funnily enough usually around the time of some recession or time of economic difficulty.

The current time of economic difficulty is no different, and people are once again making suggestions that perhaps the current monetary arrangement, inflation targetting, has run its course.

The argument is: Inflation targetting was all well and good; it gave us low and stable inflation and a long period of growth - but it also gave us asset price bubbles (share prices, house prices, commodity prices), most of which have at different points led to small recessions, and arguably to the huge recession we just suffered.

So, instead, some people have suggested a return to something called the Gold Standard. The World Bank's chief Robert Zoellick made the suggestion in the FT last week.

A gold standard is where the value of the currency is backed (at least partially) in gold, some recognisable tangible object. This is in contrast to the current system where currency is backed only in our faith that it is worth what it is worth.

If you're interested in reading more about this suggestion, and how it has been greeted, then there's a New York Times discussion on it here, with contributions from various top economists from the US.