The classical gold standard has been a source of global stability because of several factors.
a. It removed many overt political considerations from the conception, perception and actual exchange of money.
b. It restrained the inflationary tendencies of central banks and political leaders, because gold cannot be printed. Only promises of gold can be printed and when these promises are not kept, trust in the promisor is lost.
c. Most importantly, the classic gold standard has many fewer “moving parts” than quasi-metallic standards let alone the contemporary fiat money system.
Far from being a theoretical benefit that could not be tangibly implemented by the US, a classical gold standard appears to be the only way the dollar can survive beyond the middle of the 21st century.
The “myth” of de-dollarization
Many commentators have remarked that a number of Asian, Latin American and African countries are looking to “de-dollarize”, that is to say, cease pricing their exports in the US currency. Many such efforts, particularly those led by the BRICS bloc, are already in motion. However, many of these efforts are phrased deceptively, both by their proponents and by those opposing “de-dollarization”.
The fact of the matter is that countries like China, India, Russia, Brazil and their close partners do not want to replace the Federal Reserve as the central bank that controls the supply of the global reserve currency. Because of this, they do not actually want to replace the dollar as the international reserve currency - at least not anytime soon.
This is true for several reasons, the principle one being: why would countries that rely on exports to power their economy want to deal with the burden of the Triffin dilemma?
Triffin’s dilemma
The Triffin dilemma is a perpetual sword of Damocles that hangs over the head of any central bank attempting to balance international partnerships with domestic economic realities, as a result of being responsible for the global reserve currency.
According to economist Robert Triffin, a central bank whose currency is also the international reserve currency, must face an inevitable paradox. This paradox hinges on the fact that such a central bank has to furnish the international trading system with enough units of said currency for the system to remain solvent and functional. But in order to do this, the issuing country must run a trade deficit with its international partners (and adversaries) - something that is a major catalyst of domestic inflation and subsequent international crises.
In the early 1960s, Triffin noticed that the United States was in just such a crisis.
Bretton Woods and Triffin
The Bretton Woods system was a “quasi gold standard” which benefited America’s short term interests but also doomed the US in the long term.
Under the classical gold standard, each nation is responsible for maintaining its own gold reserves. Under the Bretton Woods system, the US became the de-facto custodian of the world’s gold buy guaranteeing the free exchange of $1 for 35 ounces of gold.
The system worked right up until it didn’t.
Triffin’s dilemma took its toll due to a combination of foreign and domestic factors. The State Department described what happened in the mid-60s in an unusually candid manner, “By the 1960s, a surplus of U.S. dollars caused by foreign aid, military spending, and foreign investment threatened this system, as the United States did not have enough gold to cover the volume of dollars in worldwide circulation at the rate of $35 per ounce; as a result, the dollar was overvalued. Presidents John F. Kennedy and Lyndon B. Johnson adopted a series of measures to support the dollar and sustain Bretton Woods: foreign investment disincentives; restrictions on foreign lending; efforts to stem the official outflow of dollars; international monetary reform; and cooperation with other countries. Nothing worked. Meanwhile, traders in foreign exchange markets, believing that the dollar’s overvaluation would one day compel the U.S. government to devalue it, proved increasingly inclined to sell dollars. This resulted in periodic runs on the dollar”.
Fiat: The Wrong Answer to The Right Question
Just as Britain unceremoniously gave up its quasi-gold standard (known as a gold exchange standard) in the 1930s, the US unceremoniously gave up Bretton Woods in August of 1971. But instead of reverting to a system of every sovereign entity being responsible for the stewardship of its own gold, the gold back dollar was replaced by nothing - it became a fiat currency and as a result, so did most other currencies throughout the world that had previously relied on the once stable Bretton Woods system.
Fiat did not solve the problems of the Triffin dilemma, it made them worse. While Bretton Woods forced the US to admit that it could no longer redeem dollars at the rate of 35 ounces of gold per $1, the fiat system has allowed the federal reserve to print its way out of and consequently, into every crisis.
In the recession of 2008, China’s central bank astutely pointed out that the Triffin dilemma was one of the causes of the crisis and that no one central bank ought to be in such a position, both for its own sake and that of the wider world. Ironically, it was China that provided liquidity to many economies, particular those in Asia, following the Great Recession. China was able to do this because in the minds of global investors and traders, its currency (however manipulated) is effectively tied to an economy that in the 21st century has always been able to grow its way out of trouble, particularly through exports.
It should be noted that China’s recognition of the Triffin dilemma does not make it an automatic champion of gold. China’s solution to the crisis was a proposed basket of currencies as the international unit of trade, a solution similar to that proposed by John Maynard Keynes when the Bretton Woods system was in its embryonic stage.
BRICS Loves The Dollar
They’re just not in love with the dollar. As President Trump recently pointed out, using sanctions as a go-to tool of foreign relations has damaged the dollar’s prestige in much of the so-called “Global South”. But even with the reality of a sanctions-happy US Treasury, the dollar remains king in the Global South because the large economies of Asia are all primarily driven by exports. As such, they would be self-harming if they were to voluntarily take up the role of the Federal Reserve that implicitly comes with the Triffin dilemma, just as sure as a genie has great powers but is cursed to live in a tiny bottle.
Even sanctioned countries are for all intents and purposes, still dollarized economies. This is the case because every major international fiat currency still traces its roots to the US dollar due to the phenomenon known as the “Eurodollar”.
“Eurodollars” are standard US dollars that are held by non-US banks (all of them!). These banks exchange these dollars for the domestic currency of choice of their clients throughout the world. Because BRICS countries have a clear incentive not to supplant the dollar which implicitly favors their exports (particularly when combined with clear and present currency manipulation), the Eurodollar system continues to function as the system through which both America’s allies and adversaries gain access to the vital dollarized economy.
While it is true that most BRICS nations manipulate the value of their currency in order to aid the status of their exports, the equal and opposite is true of many western currencies that are highly overvalued, including the Euro, Swiss Franc and British Pound.
To put it bluntly, there is no truth in money when gold is removed from the equation.
How will the dollar die?
The dollar will not die as a result of the machinations of America’s rivals and adversaries. It will die under the weight of a constantly growing supply of dollars as is the wont of the Federal Reserve and the Treasury alike.
China and its partners are watching and waiting for the dollar to collapse, but they have an obvious self-interest in the current system lasting as long as it is able to last. China’s interest in preserving the dollarized economy is the same interest that McDonald’s has in a constantly growing supply of people hungry for junk food.
But just as those hungry for junk food tend to shorten their lives, so too will the dollar eventually become so valueless, that even those who rely on it will have to throw in the towel. In this case, the towel is gold.
This explains why China is wisely (from its self-interested perspective) exchanging its dollars for gold at a rapid pace. China, as the leading BRICS economy, is preparing for the day when the dollar can no longer survive a future depression.
How can America prevent this?
Sticking with the junk food analogy, the dollar needs to go on a diet. It needs to gain the self-discipline and resultant self-worth that can only come from a gradual but orderly transition back to a classical gold standard.
Nothing else can prevent the dollar from eventually rendering itself worthless due to the Federal Reserve’s need to supply enough dollars to satisfy both foreign and domestic demand. In many ways this is not even the Federal Reserve’s fault, it is just the reality of fiat. This is not to say that the Federal Reserve is a noble institution, it is best described as an unnecessary one that ends up doing bad things because of its lack of necessity.
A gold standard would not only stabilize prices domestically, but it would force foreign nations to cease manipulating their own currencies since as of today, the US remains the top destination for the exports of the leading economies of the world. This would be an important step in redressing America’s out of control trade deficit with most of the world.
A classical gold standard would force the Federal government to stop deceiving itself through excess spending while also forcing global friends and foes alike to stop taking advantage of a fiat money system that allows them to export cheap goods for cheap dollars and then trade them for gold - a stable source of money in both good and turbulent times.
The US has two choices. Allow the dollar to die on its own, something that would crash the US economy, perhaps irreversibly or otherwise, return to gold. The latter will ensure the long term viability of the US economy and bring greater stability to the global economy simultaneously.