Ever since the sanctions onto Russia over the invasion of Ukraine, combined with real domestic economic anxieties of the post-pandemic era and declining institutional trust, a handful of libertarians and a mix of anti-war conservatives and the far-left have been announcing that de-dollarization was inevitable, prompted by BRICS’s desire to pursue a gold-backed currency.
The gold standard has always been part of many libertarians’ and others’ agenda, and for good reasons: it serves as a hard check on both monetary expansion and a major fiscal constraint on government spending, prevents a regressive tax on politically-unconnected populations, and therefore constrains government powers by pegging currency notes to verifiable specie instead of the whims of arbitrary “revaluations” or inflationary policy (particularly through the fractional-reserve system). Most libertarians should be able to recite the basic Misesian position without a problem.
And yes, the American economy and the American state are problematic, to say the least. I certainly don’t have to recite all of the abuses, from the most infamous and egregious practices like abusing eminent domain, hawkish foreign policy, and inflation. Libertarians should call those abuses and malpractices out as they are.
But it isn’t just strictly the American economy or the American state that are at fault for the crimes it is accused of—there are far more egregious acts committed by other states, and other economies are far more dysfunctional than the American one, and often by a long shot. Most libertarians are only vaguely aware of this, as their exposure to global economic freedom and rule of law are often dictated by metrics and brief summaries like the Heritage Foundation’s Index of Economic Freedom or positively-minded documentaries from Johan Norberg or Milton Friedman.
While these are great primers and do a good job at explaining what happens when economies liberalize, however marginal the liberalizations may be, they certainly do not explain in depth on how economic policies of those countries actually look like, other than standard citations of regulatory cronyism and rent-seeking. It’s easier to sell stories than trying to explain granular data with clinical efficiency and few emotions.
Export-Inflationary Regime with a Gold Standard?
The first major misconception of this milquetoast, post-1989, “center-right”-influenced worldview is that the former Eastern Bloc has pivoted fully towards Western capitalism. First of all, the term “capitalism” is one of the most misused and abused terms in economics and politics—any Austrian School adherent should be more than capable of pointing this out, since there’s a major difference between Friedman’s Keynesian “monetarist” thinking and Mises’s insistence on a gold standard, let alone what passes as “capitalism” in modern understandings. While Mises was older than Friedman and passed away in 1973 (only two years after Bretton Woods was abolished), both men did live a large portion of their lives under a gold standard, so they cannot be labeled together as “laissez-faire capitalist” supporters, to which such a label can only be applied to Mises.
What the former Eastern Bloc adopted wasn’t capitalism, but a mixture of Western Keynesianism and the East Asian developmental model. The East Asian developmental model, pioneered by South Korean dictators Park Chung-hee and Chun Doo-hwan and Taiwanese/ROC Chiang Kai-shek and Chiang Ching-kuo, is based upon repressing domestic wages and diverting savings and investments into industrial projects and firms through initial aggressive inflation cycles and then a “dirty” (managed) float. The mechanism isn’t just simply raw price increases as observed by consumer price indexes or producer price indexes, but also wages and compensation failing to converge with productivity gains (otherwise known as the Cantillon Effect). It is true that the US and broader Western economies (defined as those of the former Western Bloc minus South Korea and Taiwan) have seen this trend, the nature of the export-inflationary monetary regimes in the Eastern Bloc and Third World mean they have to artificially keep their wages lower than those in the West.
Of course, this isn’t to say that all development and institutional changes post-1989 were illusory or purely cronyist. Nevertheless, since the consequences of fiat currency on the West has been corrosive and measurable with the Cantillon Effect, lower birth rates, and wealth concentration in politically-connected individuals, the effects of an export-inflationary regime is much worse. The nature of inflation as a regressive tax and silent destruction of savings means; even under a standard 2-3 percent inflation per annum, the currency is devalued by 40 percent over a 20-year cycle, so people will pivot towards rapid consumption, even when accumulating debt (thanks to availability of cheap credit through fractional-reserve banking). Most people will not maintain savings as they would under something as deflationary as the gold standard.
This is why the export-inflationary regime exists and cannot exist under a gold standard. The nature of these regimes, whether with value-added manufacturing (such as China) or purely raw resource extractive (Russia and Africa), depends on Western consumption, so they have an incentive to keep inflation higher and/or other wage-repressing mechanisms stronger than Western ones. If BRICS were to implement a gold-backed currency, it would immediately expose the uncompetitive nature of their subcontracting/manufacturing or commodity extractive base and create massive political conflict with their elites who built their wealth entirely on this model. They cannot become the next South Korea or Taiwan in terms of wealth, because those countries implemented their systems in the aftermath of Bretton Woods, when inflation in the Western world had yet to complete the first 20-year 40 percent depreciation cycle.
China, Russia, and India cannot accept a gold standard, because their own institutional history and design forbid such a development. The Russian economy has always involved aggressive government restrictions and planning; the Tsarist era only abolished serfdom in 1861 (the last European state to do so) and retains significant controls over the peasantry, then the Soviet era introduced oil, natural gas, and metals extraction, which to this day are heavily subsidized and built upon historically forcibly-settled, mono-industrial towns like Norilsk, and around two-thirds of the Russian population has virtually no savings. The Chinese economy, during its formative year under Deng Xiaoping, ran aggressive inflation cycles, and since then has run occasional devaluations of the yuan. India is also dependent on this system, and it has run inflation rates well above the Western average, and even it has seen its total fertility rate dip below the 2.1 replacement rate.
Why a Western Gold Standard Could Be a Nightmare for BRICS
The second major misconception with dissident Western narratives is about China and Russia buying up gold at enormous rates. This can be debunked when you look at official public gold holdings, which the US holds roughly 8,300 tons of gold and Germany holds 3,200 tons, whereas China holds about 2,000. Germany’s economy is about a quarter of China’s, and the former holds 50 percent more gold than China. Even if one factors in China’s private gold holdings, this is still dwarfed by American public holdings, and certainly cannot scale against American or German private holdings.
A return to the gold standard doesn’t have to reestablish the historical $35/ounce peg, because it doesn’t have to. Productivity continues to rise, and ultimately money’s value rests not upon how many dollar bills in your wallet but how much can they buy. That is what the gold standard should do: guarantee price stability and the value of money, and constraint government spending with serious force.
The danger for BRICS economies is that a Western shift to the gold standard destroys the subcontracting/manufacturing “developmental” model they’re using, because Western customers will buy a lot less and invest in longer-term goals like homeownership, having children or expanding their businesses. Even after deindustrialization, the West retains its role as the world’s premier R&D hub, so an immediate shift to a much more conservative savings environment means the R&D system of major tech and automobile companies are retained, as improvements need to meet consumers’ expectations—rather than waiting for another line of expensive Apple devices or other electronic appliances that are typically manufactured in non-Western countries.
In the worst case scenario for BRICS, a Western reintroduction of the gold standard could fuel a reindustrialization of the West, as consumers and producers alike will seek higher quality than just pure quantity—something China is struggling to manage, such as with its EV overproduction. This won’t be state autarky, but a natural outcome of lower demands in the quantitative sense. Western firms will also emerge stronger, as malinvestments are quickly liquidated and savings are no longer punished via a hidden regressive tax, so overseas subcontracting and manufacturing would be exposed as unprofitable or barely profitable, thanks to their dependency on monetary and subsidies favoritism.
Of course, a Western return to a gold standard will be met with massive political pushbacks, but with increasing discontent over costs-of-living and inflation, there is fertile ground for Austrian School adherents in the West to push for it. At the end of the day, the West retains far more institutional memory of what a free market is supposed to be, something that is very alien to BRICS and much of the non-Western world, even if politicized memories remain (though correctable).
