Abstract

Researchers and economists clarify that the problem of inflation and the currency instability occurs today is due to the implementation of monetary system which is not based on valuable commodity or gold as the gold standard of the previous system. As a sequence to this, there has been a proposal to create a Bretton Woods II system by the World Bank President, Robert Zoelick, recently in 2010. The question is whether the return to gold currency is justifiable in order to ensure world economic stability. Therefore, this study aims to analyze the historical data of the inflation rate and world gold price in order to identify a more stable financial system. The study will provide evidence that the gold standard era is the most stable era thus justifies the return to gold currency. This study uses time series data for a key economic indicator i.e. inflation rate starting from year 1880 to 2008, divided into three phases of gold standard system; i.e. the full gold standard system (1880-1914) and the gold exchange standard system (1925-1931); the Bretton Woods system (1946-1972) and the fiat currency system (1973-2008), using regression model and CUSUM test. The results show that the rate of inflation and the value of world gold are much lower and more stable during the gold standard phases than the fiat money. This indicates that the move to return to gold currency is more apt in the bid to ensure global economic stability. However, more efforts are needed to resolve the implementation mechanism.

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