Ever since the subprime crisis in 2006, many commentators have said that the current international financial system is too much anchored on the US dollar. Thedownside of this system is that the US Government can transfer her own problems to other economies through the US dollar value. The famous saying "My problem, your dollar; my dollar, your problem" has vividly expressed the US dollar's importance on the global financial markets. Because of the power of the US dollar in the international financial arena, there are critics calling for an end to the US dollar's supremacy. If the US dollar were not that powerful in the international financial market, then it will also reduce the moral hazard problem outlined earlier.

One way advocated by many is to restrict the abuse of the US dollar by the US Government by returning to the Gold Standard. The classical Gold Standard is an international monetary system which involves the issue of currency restricted to the amount of gold held in reserve. Under the Gold Standard, if a country wishes to issue new currency for circulation, it must have the equivalent amount of gold on hand. For example, if the par value of gold is set at $1600 per ounce, then the US Government can issue $1600 if there is one ounce of gold in the vault of the US Government. The beauty of the Gold Standard is that the US Government cannot print money as it wishes. That means, if the US Government does not have enough gold at hand, the amount of currency in circulation will be limited. Many monetary policies adopted by the US Government could not have materialised mainly because it would not haveroom for printing money without holding extra gold.

There are some notable advantages of the Gold Standard. As the issuance of currency is restricted to the amount of gold on hand, therefore the gold holding will not change dramatically overnight, leading to a stable money supply. Having a stable money supply also means that the price level in general will be stable over longer periods of time. The major beauty of the Gold Standard is that it restricts governments' wishing to print money that easily.

However, the Gold Standard is too restrictive and it makes the economy unable to cope with rapid changes in market conditions. Under the 1929 Great Depression, because of the Gold Standard's rigidity, the US Government adopted a concessionary fiscal policy under periods of recession. This in turn leads to prolonged periods of economic depression. Also, the issuance of money is not related to the economic strength under the Gold Standard. This could lead to a case where an economically underperforming country with plenty of gold reserve can issue a lot of money, while an economically strong country cannot. Again, the issue of economic adjustments is the concern here. Also, even though the Gold Standard has the advantage on price stability, it is still unclear how long it takes to stabilize the price level. It could take years for the Gold Standard to adjust, but the adjustment process will be prolonged and quick and immediate actions are not possible.

Looking at history, it is clear that the Gold Standard cannot meet the needs of today's financial markets. If we change back to the Gold Standard, our current financial system will face a severe setback and many financial innovations cannot be done. To modern financial markets, it is not a welcome news.

Nevertheless, this issue was "rediscovered" again during the US Presidential Election. Some Republicans attacked the Obama Administration by saying that the US Government prints too much money. The Republicans suggested that by going back to Gold Standard, the misbehavior of the Democrats will come to an end. Personally I do not agree with this claim. The advantages of the Gold Standard over other currency arrangements can be a topic for academic research and intellectual debate. However, turning the clock back to Gold Standard is an unwise action.

The author is dean, School of Business, Hang Seng Management College. The views expressed here are entirely his own.

(HK Edition 09/06/2012 page2)