Gold is the answer to Paul Volcker’s call for a new Bretton Woods

On May 21, former Federal Reserve Chairman Paul Volcker, now 86, who famously slayed the inflation dragon during his tenure from 1979 to 1987, asked in a speech to the Bretton Woods Committee whether a fresh overhaul to the global monetary system is needed.

The Bretton Woods agreement of the 1940s was the landmark pact by which nations adopted exchange rates tied to the U.S. dollar. The dollar, of course, was still linked to gold until President Nixon cut that relationship in 1971.

“With prices stable in the United States, which still had a sizable current account surplus, the use of the dollar convertible into gold at the center of the system was seldom questioned,” Volcker said.

However, “the absence of an official, rules-based cooperatively managed, monetary system has not been a great success. In fact, international financial crises seem at least as frequent and more destructive in impeding economic stability and growth,” he noted.

Stressing “the need for developing an international monetary and financial system worthy of our time,” Volcker concluded: “A new Bretton Woods conference? We are long ways from that. But surely events have raised, whether we want to admit it or not, some fundamental questions that have been ignored for decades.

“We may have escaped a repeat of the Great Depression of the 1930s. Happily, despite all the political turmoil in parts of the world, we have also escaped, narrowly escaped, a financial collapse destructive of major economies and needed cooperation. But obviously, that is not enough.”

Volcker didn’t spell out the need to return to a gold standard, but someone else is warning that a failure to do so could plunge the U.S. and global economies back into turmoil. That person is Forbes Publisher Steve Forbes.

In Money: How the Destruction of the Dollar Threatens the Global Economy -- and What We Can Do About It, Forbes warns that the Fed’s “vastly misguided monetary policies are now setting the stage for a new economic and social catastrophe — one that could rival the financial crisis and horrors of the 1930s.”

His solution? “The best way to achieve monetary stability: linking the dollar to gold,” he wrote. “The Fed should have only two tasks: keeping the dollar fixed to gold and dealing quickly and decisively with panics,” he wrote. “The refusal of many in the policy establishment to entertain the idea of a return to a gold standard is based on astounding ignorance about just what a gold standard would mean and how it would work.”

Even if the U.S. doesn’t return to a gold standard, other nations are increasingly giving more weight to gold, including China and Russia. China, of course, has become the world’s biggest gold consumer as well as its biggest gold producer. Though its official gold holdings remain a state secret, it is widely believed to be quietly amassing enough gold to implicitly raise the stature of its own currency, the renminbi, on the global stage, with the ultimate plan of rivaling the U.S. dollar as a world reserve currency.

And just last month, Russian President Vladimir Putin had this to say: “For us (Russia and China) it is important to deposit those (gold and currency reserves) in a rational and secure way. And we together need to think of how to do that keeping in mind the uneasy situation in the global economy.”

Even if the dollar isn’t returned to some form of a gold standard, currencies around the world, including the greenback, are being depreciated at an unsustainable rate for middle-class savers. Devoting at least some of your dollar-denominated assets to a gold standard of your personal devising might be a prudent form of action given the uncertainties facing fiat currencies globally.