The Fate of the Dollar, the Gold Standard, and the Multipolar World

In 1971, the Bretton Woods monetary system, based on the gold standard, de facto ceased to exist (the price of gold was fixed at 35 US dollars per troy ounce, and fixed exchange rates of national currencies against the US dollar were established).

On August 15th 1971, President Nixon suspended the free conversion of the dollar to gold. It did not resume. On December 17th of the same year, the first devaluation of the dollar against gold occurred, and on February 13th 1973, the second devaluation took place. At this point, the era of Bretton Woods can be considered complete. Already in March 1973, the Jamaica conference convened to develop a new world monetary system. In 1976, the Jamaican currency system, based on “floating” (free) exchange rates relative to each other, was officially launched (the reorganisation was completed by 1978).

Briefly describing the changes that occurred, it is usually said that the era of the “Golden dollar” was replaced by the era of the “petrodollar”. But this is not quite true. Global money was declared “special drawing rights” issued by the IMF, and the dollar became only one of the reserve currencies (along with the British pound, Swiss and French francs, German mark, and Japanese yen).

Nevertheless, the US dollar indeed became the main currency of international settlements and government reserves, and Washington in reality got the opportunity to issue dollars freely (unrelated to any external indicators), which then seemed unlimited (many still continue to believe that the US is able to “print” as many dollars as they want with impunity).

However, the ability to issue any currency is limited by the volume of goods and trade turnover in the market it serves. The status of the world hegemon, supported by control over the world energy market (the blood of the economy), as well as the global economic locomotive, up to a certain point, really gave the United States the ability to issue almost unlimited dollars. At first, most of them were spent on meeting the needs of the growing global market, as well as in government reserves. Then the collapse of the US government debt started.

The latter seemed safe, as long as the extra dollars were “disposed of” in the state reserves of Japan, China, Russia, and other countries, and Washington was able to regularly service its national debt. But all good things come to an end sooner or later. The US lost its status first as a “world workshop” (due to the removal of national industry abroad), and then as a global hegemon (in the face of the same China and Russia, competitors raised, which the US could not cope with).

At the same time, more and more new dollars were needed every year to serve the needs of the virtual economy of the US (in which most of the GDP is “produced” at the expense of exchange speculation and banking instruments). Since it was impossible to earn them, it was necessary to “print” them — create them out of thin air (stock speculation, without a constant influx of fresh funds, can not give a constant growth — for balance, to play all the time for an increase is possible only if you have unlimited funds).

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In the end, the growth of the American economy’s need for new dollars became exponential. The inevitability of the collapse of this pyramid became obvious.

Three factors came together: the deindustrialization of the US, the loss of the status of world hegemon, and the inevitable collapse of the pyramid of American state debt in the foreseeable future. This trio has presented the world with two problems:

  • the “soft” landing of the United States – stretching the process of disaster in time, so that the world economic system has time to adapt to the new situation and did not collapse together with the former hegemon;
  • creating a new international monetary system based on something more stable than the current dollar.

With the former, the world is still coping relatively successfully. Relatively, because inadequate American elites are ready at any moment to “close the shutoff valve” and constantly push the planet towards a global confrontation, trying once again to solve their problems, watching someone else’s war and profiting from it to build a new American world, at the last moment supporting the exhausted winner.

As for the latter, in political and scientific circles, as a rule, they talk about replacing the dollar with the yuan, the euro, even the ruble, or even better, a basket of currencies. However, such a measure does not give anything. The Jamaican system was also formally based on a basket of reserve currencies, which did not prevent the dollar from de facto becoming the only global currency. Replacing the dollar with one new global currency or several regional currencies that are fighting for global status brings us back to the history of the US, only on a new historical page and with other performers.

Very quickly, the authorities of the country issuing the new global currency will realise that they can use the relatively uncontrolled issue to strengthen their domestic and foreign policy positions. At first, it will turn out well (like the Americans under Reagan). Then, and much faster than it happened to America, the new issuer of the global currency will be overtaken by the same consequences. The new crisis will come faster than the current one and will be more destructive in its consequences.

If the issuer of the global currency does not have time to stand out from several regional ones, the consequences will be even worse, since regional leaders may well turn to military arguments in an attempt to win financial and economic competition.

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There are, however, encouraging indicators. Russia, China, India, and even some countries of the former “civilised world” are rapidly accumulating gold reserves, getting rid of American “treasuries” (debt obligations). This, of course, can be explained by the fact that gold is rapidly becoming more expensive, against the background of falling yields of American securities, but there is one point. For example, the Central Bank of Russia said that it has already “shifted” to other currencies, almost zeroing out the dollar component of foreign exchange reserves, and continues to focus on increasing the share of gold in its reserves, rather than pounds, euros, yen or Swiss francs.

The stock of gold in Russian reserves fluctuated (slightly increasing, then decreasing) from 267 tons in 1993 to almost 387 tons in 2006. Only from this moment did its steady growth begin, and by mid-July 2020, it became 2300 tons — the largest in the history of Russia (including the Russian Empire and the USSR).

We can assume that the new currency system, which has been under negotiation since the G-20 anti-crisis summit in Washington on November 14th-15th 2008, will be based on a kind of new gold standard.

It is clear that no one will pay for all commodity deliveries in gold — it is more expensive to carry tons of precious metal back and forth. It is obvious that countries that hold significant gold reserves can set the solid gold content of their currencies. Then you do not care what you get for your product from the buyer (rubles, or yuan, or euros) — in fact, it will be a “gold certificate” — the right to receive a certain amount of gold.

Gold-backed currencies will be traded on the global market as global money. Those countries that are not able to ensure the solid convertibility of their currencies into gold will be forced to buy currencies that are converted to gold for international settlements. At the same time, it should be borne in mind that, having regained the status of a universal equivalent (ceasing to be just a commodity), gold should constantly become more expensive, because the need for it, like with “metal money, will be determined by the growth of world trade.

There is, of course, a risk that someone will want to win one-time from the instant devaluation of their currency in relation to gold, but after such a scam, it will fly out of the basket of global currencies, and the scamming country itself will have to buy other people’s currencies for its calculations.

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Some may say that it will be more profitable to have a non-convertible currency in gold, since you will be able to play on a decrease-increase in its exchange rate. But this is not quite true, because you can devalue or revalue your currency as much as you want in relation to the same ruble, but in relation to its gold content, you will remain in the original position, just for each ounce you will have to pay using more or less of your national candy wrappers.

In the era of metal money, individual states tried to reduce the content of precious metals in their coins (“debasement”). This only led to a financial crisis, because even in the domestic market, people began to prefer a full-fledged foreign coin. Games with rates in the presence of a real “universal equivalent” are much more dangerous than in the conditions of “floating rates”.

There is a risk of gold being washed out of reserves, in accordance with the principle “presenting rubles for payment” (as de Gaulle did in his time with US dollars). But de Gaulle’s actions were due to the fact that already at that time (and back then the Bretton Woods system based on the gold standard was still in operation), the Americans were trying to carry out machinations with the release of more dollars into the market than they could provide with their gold reserves. In addition, even back then, US foreign trade was unprofitable.

If your foreign trade is profitable (as in Russia, which has a solid foreign trade surplus and good prospects for increasing it due to self-sufficiency in all major groups of goods), then you will increase your gold reserves annually, and not spend them.

Given the fact that most of the countries are not able to create a self-sufficient economy and need foreign trade, Russia has every reason to hope that under such a system it will become richer and richer. If, of course, it does not follow the path of the US and does not try to create today “out of thin air” the money that it may earn the day after tomorrow or in a year. Small frauds always gradually turn into large ones, and after the loss of trust, any system collapses.

There is no absolute protection against a fool. But we must hope that the politicians of the current and next generations, who have learned from the bitter experience of brief American hegemony, will take into account the mistakes of Washington and try not to repeat them. And then there will be the 22nd century, other people and another life.


Rostislav Ishchenko

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