By Jude Wanniski

"Money, remember, is not only a medium of exchange to facilitate trade. It is, even more importantly, a unit of account that enables domestic and international producers to draw contracts over time. The superior money is one that holds its value in real terms over the lives of contracts short and long. When a currency fluctuates against gold over time, the costs of doing business increase as interest rates must climb to cover the risk.

"In the United States, my own work shows that between 1945 and 1971, when the dollar was fixed to gold at $35 oz under the 1944 Bretton Woods arrangement, the real economy in the US grew by 4% per year. From 1971 when the dollar was floated to 2004, real growth of the US economy has managed only a pitiful 0.3% per year.

New Bretton Woods

"Unless these inefficiencies are removed with a new "Bretton Woods arrangement," as Mundell calls it, Beijing, at some point, may decide that the costs of importing inflations and possibly new deflations outweigh the benefits of its imprecise currency zone. The intermediate step it has now taken moves it toward a fixed yuan/gold price. You might easily imagine the implications of this development.

"China’s economy is not yet big enough or secure enough to take on an international banking role, but at current growth rates relative to the US, it could rival the US economy in several years. With a convertible currency in the near future, it could take the next step toward fixing the yuan/gold price instead of importing its monetary policy from one or several other nations.

"It would be natural for Japan to break away from its currency zone with the US and join China's, as its trade with China continues to exceed its trade with the US.

"Malaysia's Mohammed Mahathir had dreamt of pulling Islamic nations out of their dependence on the dollar by joining in a fixed rate system among them, behind a gold dinar. As his success has been limited, it may be that China will get there first. Not this year or even next, but sooner than later."

Jude Wanniski is a former associate editor of The Wall Street Journal, expert on supply-side economics and founder of Polyconomics, which helps to interpret the impact of political events on financial markets.