Is an International Gold Standard Really Coming?

The US-led West will have to watch as the dollar loses its dominance in international trade and the fiat monetary system powering welfare economies is replaced, predicts Patrick Barron in an article published by the Mises Institute.

The First Step Has Been Taken

At the BRICS summit held in Johannesburg, South Africa, an agreement was reached on the first step towards creating an alternative, commodity-backed international trade settlement system that would almost certainly include gold.

Although the current situation can be characterised as a struggle between Western democracies and the BRICS nations that is, for now, predominantly economic, the real battle is one of ideas: between Keynesian economic theory and the Austrian school, which advocates the gold standard. Barron argues that it is gold that will emerge victorious from the coming transformation of the global economic order, becoming the settlement currency of international trade.

In the "East", Faith in the Dollar Has Already Wavered

Barron points out that since the collapse of the Bretton Woods system in 1971, which tied dollar issuance to the gold standard, the dollar has lost 98% of its purchasing power relative to gold. Moreover, uncovered money printing has encouraged irresponsible spending by successive US and Western governments.

Over the past half century, the vast quantities of fiat money printed have financed wars, welfare programmes that deepen individual dependence on the state, and, in accordance with Keynesian economic principles, generated artificial demand to overheat the economy.

The sanctions imposed on Russia following the invasion of Ukraine, including the freezing of Russian central bank assets held in the West and the exclusion of Russian economic actors from the SWIFT system, have shaken the confidence of countries aligned with the "non-Western" axis in the dollar-based financial system and accelerated the shift towards an alternative, commodity-backed settlement system.

The depreciation of major currencies against gold between 1971 and 2021.

The chart illustrates how the dollar (green), the euro (orange), the Swiss franc (black), and the British pound (blue) have depreciated against gold since the end of the Bretton Woods system.

Is a Gold-Backed Settlement System the Future?

According to Barron, the new international settlement system that the BRICS nations seek to create offers both political and economic advantages that will attract other countries to join.

For participating countries, the political benefit derives from the fact that no single nation will be able to unilaterally influence the settlement and completion of transactions. This is a fundamental difference from the currently hegemonic dollar-based system, in which every commercial transaction denominated in dollars passes through the US banking system.

The economic advantage is that within a gold-backed settlement system, a member country can only expand its imports by expanding its exports. Otherwise, gold would flow out of the nation's gold settlement account, leading to a suspension of imports. In this way, the gold-based system "encourages sound economic practices in the economies of its members."

This places market pressure on member governments to reform their domestic economies in order to increase output. Government expenditure on welfare programmes is minimised, enabling resources to be directed towards productive activity rather than feeding the state apparatus, Barron explains.

If the new system proves effective, the gold-backed international trade settlement system will over time extend to the domestic monetary systems of its members, and fiat currencies, which governments can inflate or devalue at will, will be consigned to the dustbin of history. Rather than Keynes's 1924 prophecy about gold, it will be fiat money that becomes the "barbarous relic," Barron concludes.

Good Delivery Standard gold bars lined up awaiting shipment.

Central banks hold bars such as these in their gold reserves. These are the bars that would provide the backing for any future gold standard.

Goldtresor View

We discuss the advantages and disadvantages of the classical gold standard in more detail in this article.

It is worth highlighting that even during the era of the classical gold standard, the most powerful member of the financial settlement system, Great Britain at that time, covered only a fraction of its printed money with physical gold, in contrast to peripheral countries such as the Austro-Hungarian Monarchy, where the market demanded that the majority of money in circulation (on average around 60%) be gold-backed.

Even if a new international gold standard were to be established, the most powerful members of the alliance (currently China and India) would find this old formula attractive. A counterweight to this is that the BRICS+ joint settlement system would likely operate on a blockchain basis, which would mean far greater transparency for participating members than the classical gold standard provided.