In a previous article, I suggested that the BRICS—led by China and Russia—might offer an alternative international trade settlement system that would be independent of the US and the dollar. The BRICS have consistently stated that the world needs to move on from the dollar-centric hegemony that has existed since the Bretton Woods Agreement in 1944 and toward a multipolar world. I pointed out that China plans to establish gold vaults/banks outside its borders for the first time. The significance of this plan cannot be overstated. There are at least two goals.
Why China Seeks to Establish Gold Vaults/Banks Outside of China
The most likely goal is to establish an international trade settlement system based on gold. Trade among nations would be tallied in gold and periodically settled for the net amount. Since it’s only the net amount that would change hands, very little actual specie would need to be maintained in foreign vaults/banks.
Another goal could be to back China’s currency—the yuan—with gold. Trading partners would be reassured that goods bought by China using yuan could present yuan to one of the gold vaults/banks in exchange for gold at the agreed upon gold/yuan exchange rate. This scenario would be similar to that established at Bretton Woods, which President Nixon “temporarily suspended” in late 1971. Nixon refused to honor the promise to redeem dollars at $35 per ounce, and there was nothing that our trading partners could do about it. The US housed its gold in US vaults and simply refused to relinquish it. Such would not be the case if our gold had been housed in foreign countries.
US’s Bad Stewardship Abets the BRICS
For whatever the reason, establishing an alternative to the dollar-centric world has been facilitated by US action. First, the US inflated its currency, so that it became impossible to honor the golden redemption promises. Second, it “sanctioned” Russia and some countries supporting Russia by cutting them out of the SWIFT messaging system that is the backbone of the dollar trade settlement mechanism. And, most egregiously, it first froze Russian assets in Western banks and later actually confiscated those assets. (We ordinary mortals call this theft.) These actions have led directly to the possibility of what may become an international trading settlement system that is far superior to the dollar.
The US and its Western allies may scoff at this challenge, but it only became possible due to high-handedness (to use the kindest word imaginable) and outright illegality of US actions. We now have a multi-polar world. The US and its Western allies have been led down a dead-end path by Keynesian fantasies that fiat money can replace gold. Thus, there has been a massive transfer of gold from West to East. According to well-respected and independent monetary analysts like Alasdair Macleod, both China and Russia have accumulated enough gold with which to back their currencies at a reasonable exchange rate. According to Macleod, they have refrained from doing so for geopolitical reasons, but those reasons may become surmountable in the near future.
Power Corrupts
None of this would have been necessary had the US kept its foreign policy separate from its monetary policy. But it unwisely used its temporary ascendency in monetary affairs as a foreign policy tool. But, as Lord Acton pointed out in 1887, “Power corrupts and absolute power corrupts absolutely.”
