Wednesday, October 31, 2012

Why do the Germans want their gold back?
With the Cold War a distant memory, many Germans want the gold returned to their own country. A campaign called ‘Bring Back Our Gold’ has gathered significant support. Politicians and the popular press have jumped on the bandwagon.

One, this generation of Germans is far more assertive about their national interest than their parents were. For 50 years, most Germans were anxious to show they were citizens of the world. They dealt with post-war guilt by signing up for every international body available. Now they are quite happy to be citizens of Germany, and to stand up for their own interests.

Two, trust in financial institutions is dwindling all the time. Central banks built up a system of debits and credits because it was easier to move gold around on a ledger than to move it around on trucks. There are few more tempting targets for thieves, after all, than a cargo of ingots.

So it made sense for German gold to be stored elsewhere. But now people no longer trust those systems. They are increasingly unhappy with assets that are simply recorded on a bank’s balance sheet somewhere; they want something physical they can see and touch. That is true of national gold reserves, but it is increasingly true of other assets as well.

Thirdly, and most importantly, German sentiment is hardening against the single currency with each month that passes. After all, what is a whole vault full of gold in the basement of your central bank good for exactly? Starting a new currency, of course. And, er ... that’s about it. 

There’s nothing else you can do with it. In the most extreme circumstances, if the euro broke down chaotically, and national currencies were bought back overnight, one of the key things the foreign exchange markets would look at when putting a value on the new deutschemarks, lire or francs would be the amount of gold the central bank could back it with. That gold would seem a lot more valuable if it was held in your own country rather than a foreign one.

The campaign to bring back the German gold is in reality a campaign to bring back money that people can trust. The political establishment might not have caught up yet. But popular opinion believes it was sold a dog when it joined the euro EURUSD -0.01% , and is already looking forward to the day when it escapes responsibility for endless bailouts of its neighbors.

Yet it is hardly confined to Germany. Distrust of central banks rigging the monetary system is spreading from country to country. There will be many staging posts in the long road back to some form of gold-backed money — and the German campaign is just the beginning.

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