(This item originally appeared at Forbes.com on July 16, 2023.)
After months of debate about various currency and commodity baskets, a Russia- and China-led consortium has apparently settled on using gold as the basis of a planned new international currency system separate from the US dollar and euro. As recently reported by state-funded Russia Today, an upcoming meeting of leaders from Brazil, Russia, India and China in August may include the formal introduction of the new initiative.
This would be similar to the Bretton Woods meeting in 1944, where, after the floating currency chaos of the Great Depression, a new gold-based international currency architecture was laid out. The centerpiece was the US dollar, which in turn would be linked to gold at $35/oz., its gold parity since 1933. This laid the foundation for two decades of peace, prosperity, and fixed exchange rates, which sadly came to an end when the US dollar was floated from its golden anchor in 1971.
Since then, various governments have attempted to move back toward an international arrangement based on gold. In 2019, Malaysia’s prime minister Mahathir Mohammad proposed a Pan-Asian currency based on gold. “At the moment we have to depend upon the U.S. dollar but the U.S. dollar is also not stable. So the currency that we propose should be based on gold because gold is much more stable,” Mahathir described. This too mirrored the Bretton Woods debates, where John Maynard Keynes’ “bancor” proposal, which amounted to a global floating fiat currency, was abandoned in favor of the gold-based U.S. dollar at the heart of the system.
In 2009, Libya’s Muammar Gaddafi proposed a Pan-African currency, the gold dinar, echoing the gold dinar coins of the Arab Caliphates that once ruled North Africa. But, unrest in Libya in 2011 put an end to such ambitions.
Also in 2009, the head of China’s central bank, Zhou Xiaochuan, wrote: “An international reserve currency should first be anchored to a stable benchmark and issued according to a clear set of rules … [Its] adjustments should be disconnected from economic conditions and sovereign interests of any single country. The acceptance of credit-based national currencies, as is the case in the current system, is a rare special case in history.”
Although Xiaochuan did not say how these goals might be achieved, we can assume it would be done exactly the same way that Mao Zedong ended hyperinflation in China in 1950: By fixing the yuan to gold.
In Moscow, leading intellectual Sergey Glazyev recently proposed a “Gold Ruble 3.0,” referencing the gold-based rubles of both the Czarist era, and then the Soviet Union. Russian media reported that Russia and Iran are in talks to establish a gold-based cryptocurrency for international trade.
All of this rumbling may have come to nothing, if not for the outbreak of hostilities in Ukraine. This was immediately followed by the isolation of Russia from the entirety of the Western financial system, including US and EU banks, and the SWIFT system for international bank payments. The Russian government was ready to make interest and principal payments on its euro-based bonds, but it literally could not do so. To add both insult and injury, roughly $600 billion of foreign reserves, held in custody in the US and EU, were “frozen,” and likely to be confiscated.
This was a wake-up-call to all governments worldwide that held dollar or euro foreign reserves, or used the SWIFT banking system. The time had come to set up alternative arrangements.
This would also require a degree of independence from the International Monetary Fund. Although the IMF was set up at Bretton Woods in 1944 explicitly to reinforce the system built around the golden dollar, by 1978 that mission had become obsolete. In a 1978 revision to its Articles, the IMF allowed governments to link their currencies’ value to anything “other than gold” (Article IV, Sec. 2a). The IMF itself would follow “the objective of avoiding the management of the price, or the establishment of a fixed price, in the gold market.” (Article V, Sec. 12a) In other words, the IMF banned the gold standard among all member countries. The effect was to maintain the floating fiat dollar’s primacy in international affairs.
Today, a “gold standard” proposal comes with a cloud of fallacious ideas, having to do with the “balance of payments” and other odd notions. It is best understood as simply a means to stabilize currency value. Today, many countries’ currencies are linked to the euro, including Bulgaria, which uses a euro currency board. A gold standard system is the same basic idea, but using gold instead of a floating fiat euro. All of today’s electronic payment systems would remain the same.
This was the principle that all of the Western World (and actually the Eastern World as well) followed for the past 600 years since the Renaissance. It worked very well. Gold was indeed tolerably stable in value, in the short and long term — stable enough that countries that stuck to it suffered no ill consequences as a result. They may have suffered for other reasons: Mao’s Great Leap Forward (1958-1962) resulted in mass starvation, even though the yuan remained linked to gold. But, gold never failed to serve its role as a reliably stable standard of value.
“The only adequate guarantee for the uniform and stable value of a paper currency is its convertibility into specie [gold or silver] — the least fluctuating and only universal currency,” said President James Madison, the primary author of the US Constitution. Today, much of the world wants a basis for their currencies that is stable in value, and also “universal” — that is, something everyone can agree on. Just as at Bretton Woods in 1944, there is only one thing that meets this need, and we all know what it is.
