At the Foundation for Economic Education Nicholas Anthony muses over whether central banks are trying to engineer a return to the gold standard:
In game theory, opponents can make threats and promises, but this is mostly considered cheap talk. There’s no cost to say it and there is no cost to receive it. So, why not do it? It is for this reason that no player will change what their strategy is in response to cheap talk. However, signaling is a different matter. A credible signal is costly and separates the aces from the jokers.
Accumulating gold is a costly, credible signal.
In the case of the US-China trade war, China could use gold holdings to dump the dollar. If so, the US would incur a cost much higher than the revenue from tariffs levied on Chinese businesses and American citizens. By accumulating these holdings, China signals that coordination is a better long-term policy.
The Chinese authorities could always make the yuan fully convertible and try to have the yuan replace the dollar as the world’s reserve currency. Just a thought.
Here’s an exercise for the interested student. Assume that the EU, China, and India all return to the gold standard. What would the implications be for the United States? I would speculate that no American politician would have the vaguest idea of what to do under a gold standard and would frantically try to pursue a decreasingly convincing business as usual.
That’s not actually something I’m particularly worried about for simple reason. China, the EU, and India are all in worse shape than we are.