New gold-backed currency?

Russia is reportedly leading the development of a new trading currency backed by gold. The creation of a new currency, let alone a gold-backed one, would have serious consequences, many impossible to calculate, for international finance. Even if it doesn't materialize, the thought of a new currency, indicates that numerous countries have tired of the dominance of the US Dollar in the global economy. The new currency is apparently to be formally announced at a summit of the BRICS member states in South Africa, due to be held in August in Cape Town. BRICS is the acronym for Brazil, Russia, India, China and South Africa; other countries are eager to join the bloc, which has grown in status and clout. The expansion of the bloc will undoubtedly be seen as a challenge to US global political and economic dominance.

How reliable is this report? It comes from the state-run television network RT, which has been widely banned in Europe and North America since Russia launched its military attack on Ukraine in February 2022. RT does not have the reputation of an authoritative source of information. So it may or may not be true that a new currency will shortly be announced.

The ambition is real...

However, the ambition to topple the US Dollar from its dominance of global trade is not in doubt. The previously unchallenged role of the Dollar as the globally preferred currency has been eroded since the US and those countries that support its backing of Ukraine in its war with Russia froze Russia's billions of Dollar reserves held overseas. As part of the sanctions imposed on Russia, several Russian banks have been excluded from using the SWIFT global system for settling financial transactions. Currently there is considerable high-level diplomatic wrangling over what to do with those frozen billions; some countries want to see them confiscated and used to re-build Ukraine after the war. That proposal however would be challenged in law courts.

What about the idea that a new currency might be backed by gold - a new 'gold standard'? The classic definition of a gold standard implies that a country or countries fix the value of their currencies to a specified amount of gold. This rigorous form of a gold standard may not be what's planned. A gold standard might solve one of Russia's complaints - it would provide immunity from political pressure. But it might also create some drawbacks. It could potentially limit the expansion of credit. It ties the hands of governments who might wish to stimulate their economy by expanding the money supply. Opinions on the creation of a gold-backed currency, a new gold standard, are sharply divided.

But its aim is unclear

One of the countries seeking to join BRICS is Iran. Its assistant foreign minister, Rasoul Mousavi, has said the creation of this new gold-backed currency will weaken the Dollar and the Euro and will benefit Iran. "A tremendous change is taking place in the international economy" he said. That isn't open to doubt - but what shape will it end up in? On her trip to China Janet Yellen, the US Treasury Secretary, dismissed the idea that the Dollar might be displaced in the near future. As she would.

"A tremendous change is taking place in the international economy"

Several things are happening simultaneously. It is undeniable that developing countries want to join the BRICS bloc. The central banks of a number of these countries have been buying gold, presumably because they see gold as providing the kind of security that has to an extent evaporated from the US Dollar. They have watched as the Dollar has become weaponized; they fear the same freezing of their overseas foreign reserves if they offend the US. The membership applications list for BRICS is crowded for the same reason - the aim is to snub the US. The mere existence of a BRICS bloc is enough to achieve that. And, despite the current slow-down of the Chinese economy, the likely future is that China's economy will soon vastly overshadow that of the US.

A further complicating factor is that China is hotly pursuing the extension of its own Central Bank Digital Currency (CBDC), the e-Yuan. Public sector workers in the Chinese city of Changshu, with 1.7 million people, are now being paid fully in this digital Yuan. The digital Yuan is intended to be used for cross-border transactions, and it might be useful as a workaround to any potential international sanctions. A new gold-backed BRICS currency would somehow need to fit into this long-term policy aim of China.

The Dollar gained its international currency status at the post-war Bretton Woods conference in 1944, where world leaders came together to try to push for a replacement of the Pound as a currency to be used for inter-country trade. The Bancor, the Orb, the Unicorn were all considered and rejected; the US, with its substantial gold reserves, was seen as providing security and so the Dollar became that international currency. That top slot is proving tricky to hold onto - in recent months Brazil and Saudi Arabia have used the Russian Rouble and China's Yuan for some of their trade. Using the Dollar as a weapon is a bit like treating illness with an antibiotic - overuse or misuse can promote resistance.

So is the floating of a gold-backed currency a useful political gesture rather than a necessary economic innovation? Will it happen or is it a piece of disinformation? August in Cape Town could be the signal for the start of a much higher gold price or it might be a damp squib. Until we have a source other than RT we will remain sceptical.