(This item originally appeared at Forbes.com on June 18, 2019.)
“Speaking truth to power” is nice, I guess, but “speaking truth while in power” is exquisite. Mahathir Mohammad, prime minister of Malaysia, recently proposed a pan-Asian currency based on gold, using the very public forum of the International Conference on the Future of Asia in Tokyo for this opportunity.
Mahathir certainly ranks among Asia’s great leaders, having well earned his position among the pantheon of superstars including Singapore’s Lee Kuan Yew, China’s Deng Xiaoping, and Japan’s Ikeda Hayato. During his earlier term as prime minister of Malaysia in 1981-2003 (yes, it was 22 years), Malaysia rose from an economy of subsistence rice agriculture, rubber and palm oil plantations, and tin mining to an industrial manufacturing center with a prosperous and modern middle class. Malaysians apparently know a good thing when they see it, so again in 2018 they raised the 93-year-old Mahathir to the country’s top job.
Mahathir proposed that this gold-based currency would serve as an alternative currency throughout Asia, used in international trade and investment, perhaps in much the same way as the dollar serves as an alternative currency today, alongside independent local currencies.
“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,” he said at the conference.
Mahathir’s proposal has many similarities to proposals that he has made at least as far back as the Asia Crisis of 1997-1998, when many Asian currencies collapsed. Then, and continuing at least through 2007, Mahathir proposed a “gold dinar” again for international use among Islamic countries (in Asia this includes Malaysia and Indonesia, along with many countries of the Middle East). The Islamic countries have a very long history of a gold dinar, a gold coin containing 4.5 grams of gold. The dinar (and its precursor, the Byzantine solidus) was the basic currency of the Islamic Caliphates from the seventh century through the thirteenth century, and the tradition carried on after that as well.
Muammar Gaddafi of Libya also made similar comments in favor of a common gold-standard policy for Islamic North Africa, and Africa as a whole. Some people think that the perceived threat of this plan, to the hegemony of the floating fiat U.S. dollar, was one motivation for the invasion of Libya by U.S.-led NATO forces in 2011, which cemented Gaddafi’s downfall.
Mahathir noted that, in Asia, the idea of adopting another country’s currency (such as the yuan or yen) is not popular, due to fears of a loss of sovereignty. Thus, the idea of an “international currency” is apparently to defuse such fears. However, in time, if the project is popular, local currencies could also follow the policy of linking to gold, which would thus bring all of Asia under a common currency standard. This solution would also maintain domestic currency sovereignty without the need for centralized institutions like the European Central Bank, and all the supranational superstructure that has accompanied it, which Britain, and possibly Italy, are now trying to escape.
This is nothing new for Asia. Asia actually has a long history of floating fiat currencies. China had four centuries of experience with paper currencies in the 11th through 15th centuries. It was so traumatic that China returned to a policy of silver, gold, and copper coins alone, which continued until the 1930s. Many other Asian countries copied the Chinese paper currency model, with similar results. Floating fiat paper currencies emerged in Vietnam, Korea and Japan long before they were ever seen in the West, while the Mongol paper currency of China’s Yuan Dynasty was also apparently used in Java (Indonesia) and points west up to the borders of Europe. Their history was not very good. Again and again, Asians returned to gold, silver and copper coins.
Until the 1870s, silver and gold were largely interchangeable as currencies, so a silver currency and a gold currency were almost identical. Beginning in the sixteenth century, the Spanish silver dollar served as a common international currency throughout Asia. By some estimates, more than half of all the silver mined by the Spanish in the New World ended up in Asia in the form of these silver dollars, much of it directly exported from Acapulco, on the Pacific side of Mexico. The Chinese called these Spanish silver dollars “yuan,” or “round object,” to distinguish from their domestic copper coins, known as “wen.” The Chinese term was eventually became “won” in Korea and “yen” in Japan. The Spanish silver dollar served as the original basis of those currencies, just as it served as the original basis of the U.S. dollar, Philippine peso, Hong Kong dollar and Singapore dollar. These circulated alongside gold coins such as the Japanese ryo, and gold ingots known in China as sycees.
After 1870, silver’s long and close relationship with gold broke down, and silver no longer served as an effective basis of money alongside gold. Asia began transitioning toward gold, following Europe and the U.S. The Bank of Japan formally went to a monometallic gold standard in 1897. The Philippines went to gold in 1903, with U.S. guidance. Korea adopted the gold standard in 1901. China did so in the 1930s, although this was immediately followed by a period of fiat currency debasement to fight the war with Japan that began in 1937. After a catastrophic bout of hyperinflation in the late 1940s, the Chinese yuan was again linked to gold in 1950, and this gold basis continued unchanged throughout the 1950s and 1960s.
In Malaysia (then the Malay States of the British Empire), the Straits Settlements (Singapore) dollar was linked to gold in 1906. During the 1950s and 1960s, Malaysia’s currency was linked to gold within the Bretton Woods gold standard system. This gold link was severed in 1971, along with many other countries around the world as the Bretton Woods system disintegrated.
The idea of domestic macroeconomic manipulation via the use of floating fiat currencies is not as popular in Asia as it has been in the U.S. and Britain. Asians hew to the notion that a currency should be as stable, reliable and unchanging as possible. In recent decades, this has more commonly taken the form of a U.S. dollar peg. Ideally, everyone can share the same currency standard (even if they maintain domestic currency sovereignty), so that everyone can do business with one another without having to deal with different currencies with unstable foreign exchange rates. In practice, over the last 500 years in Asia, this has meant currencies based on silver and gold; and then, after 1870, gold alone.
It is possible to imagine (although not so easy to actually do in the real world) some kind of currency standard that, through some kind of statistical aggregation or whatnot, produces some kind of standard of value that is more stable in value than gold. One problem here is that such a standard is not likely to be broadly accepted. It would be dependent on some statistical agency, itself the product of some individual government. Unfortunately, every statistical agency has always come under political influences — look at the many changes to the U.S.’s own Consumer Price Index over the years, with each change making the statistics look better than they would have, without the changes.
Gold — and, historically, its adjunct silver — has been the only standard of currency value that all governments have enthusiastically adopted. It is free of human influence. Although one could claim that it is not quite perfect, nevertheless, over centuries of experience, we have found that it is perfect enough, and no great practical difficulties arise from its use. Nothing better has ever been found.
The power of the gold standard increases as more and more countries use the same standard. A common gold bloc in Asia — perhaps extending also to the Islamic countries of the Middle East — would be a powerful response to the fiat currency hegemony of the West. As Mahathir suggests, Asia’s leaders should begin taking steps in that direction.
In the past, when writing articles like this, I would argue that the West in general, and the U.S. in particular, seems to be on a path of decline that will probably be mirrored by a decline in currency quality. But, actually, the U.S. has been on the “Yellen gold standard” for some years now. Why don’t we just shake hands and make it official? It’s what people did at a hotel in New Hampshire back in 1944.
