After months of deliberation regarding multiple potential commodity and currency baskets, it appears a consortium led by China and Russia has finally settled on using gold as the foundation for a new international currency system. This system is poised to operate independently from the euro and the U.S. dollar, a remarkable shift in the global economic landscape. State-funded Russia Today recently hinted that the introduction of this initiative could be on the docket at an upcoming meeting of leaders from Brazil, Russia, India, and China this August.
Such a development seems to echo the past, specifically the historic Bretton Woods meeting of 1944. In the midst of the Great Depression’s tumultuous floating currency chaos, a new gold-based international currency architecture was established, with the U.S. dollar – tied to gold at $35 per ounce – serving as its centerpiece. This system facilitated two decades of peace, prosperity, and stable exchange rates, but these ended when the U.S. dollar was unpegged from gold in 1971.
Subsequent years have seen various governments attempting to transition back to a gold-based international arrangement. One prominent example is Malaysia’s Prime Minister Mahathir Mohammad’s proposal in 2019 for a Pan-Asian currency founded on gold. This suggestion mirrored the Bretton Woods discussions, where John Maynard Keynes’s “bancor” – a global floating fiat currency – was ultimately abandoned in favor of a gold-based U.S. dollar.
Other historical efforts include Libyan leader Muammar Gaddafi’s 2009 proposition for a Pan-African currency, the gold dinar, an echo of the gold dinar coins of past Arab Caliphates. This proposal fell through due to unrest in Libya in 2011.
In the same year, Zhou Xiaochuan, the head of China’s central bank, suggested that an international reserve currency should be underpinned by a stable benchmark, disconnected from the economic conditions and sovereign interests of any single country. While he did not elaborate on how to achieve this, many speculate that he was advocating for the yuan’s fixation to gold, as Mao Zedong had done to end hyperinflation in China in 1950.
Even Russia has shown interest in a return to a gold-based economy. Russian intellectual Sergey Glazyev proposed a “Gold Ruble 3.0,” a nod to the gold-based rubles of both the Czarist era and the Soviet Union. Reports emerged that Russia and Iran were discussing the establishment of a gold-based cryptocurrency for international trade.
This trend might not have amounted to anything substantial if not for the outbreak of conflict in Ukraine, which led to Russia being isolated from the Western financial system. Unable to make payments on its euro-based bonds and with roughly $600 billion of foreign reserves “frozen,” the Russian government found itself facing a major economic challenge. This situation served as a wake-up call for governments globally to seek alternative arrangements, independent of the dollar, euro, and the SWIFT banking system.
In this context, independence from the International Monetary Fund (IMF) also comes into the picture. Although the IMF was originally established to reinforce the golden dollar-based system, by 1978 its mission had changed, and it allowed governments to link their currencies’ value to anything “other than gold.”
Today, a gold standard proposal is often misunderstood and mired in false ideas regarding the balance of payments and other misconceptions. It’s best to view the gold standard as a strategy to stabilize currency value. It’s a system similar to that used by countries whose currencies are linked to the euro, like Bulgaria, which uses a euro currency board.
History reminds us that this system was followed by much of the world for the past six centuries since the Renaissance, and it worked well. Gold’s stability in value, both in the short and long term, ensured that countries that adhered to it suffered no ill consequences.
As President James Madison, one of the primary author of the U.S. Constitution, once stated: “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.” Today, with much of the world seeking a stable, universally accepted basis for their currencies, there seems to be only one element that fits the bill. As in 1944, it appears the world might once again be turning to gold.
