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A World Of Multiple Reserve Currencies


An example of “gold blindness” from Barry Eichengreen, Professor at the University of California in his recent article on reserve currencies:

“… the view that there can be just one international and reserve currency at any point in time is inconsistent with history. Before 1914, there were three international currencies: the British pound, the French franc, and the German mark. The dollar and the pound then shared international primacy in the 1920’s and 1930’s.”

While there may have been many paper currencies, he ignores the fact that in times past the various versions of gold standard in operation meant that gold was in effect the underlying sole reserve currency.

He also has an interesting view of central bankers, stating that their “… reserve managers do not have the high-powered financial incentives of hedge fund managers to seek to maximize returns. … They have social responsibilities, and they know it.  This means that they have less incentive to herd – to buy or sell a currency just because everyone else is buying or selling it. They can adopt a longer time horizon, because, unlike private fund managers, they do not have to satisfy impatient investors. Compared to private investors, then, central-bank reserve managers are more likely to act as stabilizing speculators.”

Well, in respect to gold I think the documented switch by central banks in general from selling gold to buying it could be used to make a case that they are herding along with impatient investors. In fact, it would probably be more accurate to say they are following rather than herding, as central banks were selling all the way through gold’s 10-year bull market, only switching to net buying in 2009. Question is why the switch? For “social responsibility” reasons or as (un)stablising speculators?

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