Justin Lin Yifu proposed “pure gold” as an alternative to the US dollar-dominated global international financial system two years ago. Lin served as chief economist to the World Bank during the global financial crisis and his criticisms and observations at the time, often dismissed in the West, have now become respectable and even obvious. But his most ambitious vision may have been superceded — by Bitcoin.
Pure Gold, meant to get around the problem of nation states manipulating currencies used by others as a reserve, is based on a supranational central bank that would be responsible for determining when and how much of the global currency to print.
Lin explained the concept and his analysis of the 2008 global financial crisis at the Boao Forum for Asia, China’s big annual gathering of politicians and business leaders.
When asked whether Bitcoin could do the job instead of creating a new multinational infrastructure, Lin was dismissive. He said Bitcoin is just about payments and circulation but it does not serve a reserve function, as gold once did.
That might be true for the moment but it is just as possible — even more possible — to imagine a digital currency fulfilling gold’s role as a store of value, means of exchange and pricing benchmark as it is to imagine a scenario in which the United States would voluntarily give up its seigniorage.
Pure Gold shouldn’t be dismissed as a concept. The global financial crisis has exposed the current system as an overly mighty US financial system that has been constantly bastardised by developed countries to avoid recessions.
US Federal Reserve chairman Alan Greenspan’s response to the technology bust of 2001 involved slashing short-term interest rates to nearly zero. Japan has a two-decade track record of papering over its troubled industry.
Europe is flirting with Japan-style deflation. And the US may be tapering but it still prints $55 billion a month to buy Treasury bonds and keeps interest rates low enough to stifle animal spirits, distort global capital flows and endanger long-term institutional savers.
So it’s not like the status quo is doing a great job. Lin continues to call for more voting rights in multilateral organisations to be transferred to increasingly wealthy emerging markets, and it seems the West (Europe in particular) can’t monopolise them forever. There will come a time when China and other big emerging markets have a more meaningful say — at which point they will need ideas. They will turn to people such as Justin Lin.
Lin has developed a deserved reputation as an independent and creative thinker. He should therefore be more flexible about Pure Gold and look at what digital currencies may yet achieve. Satoshi Nakamoto invented Bitcoin in 2009 at a time when Lin was arguing within the IMF that the West needed to leverage fiscal policy towards reinvigorating its outdated infrastructure, as a Keynes-like response to the Great Recession. (The IMF officially adopted this view in 2011.)
Since then it has emerged as more than a payment system: it and its digital rivals are actual currencies.
Moreover, Bitcoin has some advantages that Lin should consider. First, it can’t be controlled by governments, whereas governments who own the most gold can manipulate it: just look at how those reserves sitting beneath Fort Knox helped allow the US to call the shots after World War II. (And today, incidentally, rich developed countries still own by far the biggest share of gold in the world.)
Of course, governments can also attack digital currencies — as China has recently done by banning financial institutions from offering Bitcoin-related services. (This could be one reason why Lin can’t equate Bitcoin to Pure Gold.) Clearly the leading powers would need to bless and possibly jointly back a digital currency that would serve as an international reserve; or global markets would have to so overwhelmingly endorse a Bitcoin that governments felt compelled to follow. We’re not there yet.
Another point to consider is that, although Bitcoin has a limited supply, and the computing power required to create new units now is so demanding that it is difficult to do so, so is gold. New supply of gold is minimal. In fact, digital currencies don’t have anything near the same costs of extraction, shipping and storage that gold requires.
Another downside to gold is that, ultimately, central banks have always had to have the yellow metal in the vault in order to inspire global confidence in the gold standard. While a digital currency may have its own challenges around inspiring confidence, these are probably more about data protection and transparency than Fort Knox.
Gold’s plus side is that it can be leveraged and financially multiplied. The bullion sitting in private banks’ vaults (mostly in London) is loaned, traded, collateralised and rehypothecated. The same gold bar is probably underpinning millions of transactions around the world. Digital currencies still lack the infrastructure to achieve something similar — and the fraud around Mt Gox suggests Bitcoin has a long way to go.
But these are challenges that digital currencies can and will overcome. And a digital currency, because it is private, offers a genuine alternative to the US dollar that requires neither a fairytale America giving up its power voluntarily or a global financial apocalypse that destroys the dollar. The question is whether, as China and other developing countries secure greater influence on international financial affairs, they are open to existing alternatives or feel the need to create something from scratch — which they can control.
Lin made clear that he believes the ascension of the renminbi as a reserve currency is not an ideal solution. Joining or displacing the dollar still leaves the world with the problem of a national currency being taken as a global reserve currency, with the same inherent conflicts. He should therefore be ready to consider a private alternative, provided Bitcoin and its heirs mature.
