This month the heads of state of Brazil, India, China, and South Africa, and Russia’s foreign minister standing in for their president, will gather in Johannesburg. That the city was home to a late 1800s gold rush may be resonate with history if this this year’s BRICS meet kickstarts a part-return to a gold standard global monetary system.
That speculation is fed by BRICS’ criticism of the dollar: Russia in the aftermath of recent imposition of financial sanctions; China says “the hegemony of the US dollar as the main source of instability and uncertainty in the world economy”, and in 2013 launched a ‘Belt and Road Initiative’ calling for “strengthening” “currency circulation”. Emboldened by increasing US interest rates adding to global borrowing costs, India and Brazil have pushed for greater use of local currencies. What might follow?
The Power of the Dollar as a constraint
The dollar’s power rests on three properties: i) valuation; ii) liquid transactional settlement; iii) a safe institutional asset for investing. The dollar’s most important role is the asset role, which is underpinned by global acceptance – beyond any alternative.
As a result, in 2022 the dollar accounted for 58% of global foreign exchange reserves, with the Euro in second place at just 20%. The closest BRICS rival is China’s Renminbi, which accounts for just 2.7% of foreign exchange reserves. The US is involved in some 90% of global foreign exchange transactions and dominates world trade. Some half of global trade is invoiced in dollars although the USA accounts for only around 10 to 15% of world trade.
That operational primacy points to a further unique international macroeconomic role of the dollar and cost the US economy. Where BRICS members, except India, run persistent trade surpluses, the USA has run persistent trade deficits since the 1970s. In the case of China, these surpluses are also not linked to commodities exports. Moreover, according to Michael Pettis, Peking University Finance Professor, in China’s case these surpluses are also driven by a low wages, or low household income share, relative to China’s economic size and labour productivity. Chinese consumption is hence disempowered – and this makes China’s trade surpluses harmful to global demand.
Since the USA is the issuer of the currency keeping that imbalanced order afloat, Pettis says it tends to step up as the ‘consumer of last resort’. Persistent USA trade deficits also then reflect exaggerated American consumption vacuuming up a share of the resulting ‘excess’ global production - ultimately hurting American manufacturing and consumers. Any chance to the system, Pettis adds, would likely mean an end to that inflated consumer role of Americans, in term implying disruptive change across and within trading nations.
Are the BRICS so frustrated with the dollar they are ready to impose such pain? How even would they do it?
How Might the BRICS Diversify towards a Multi-Currency world?
First, South Africa’s Ambassador at Large: Asia and BRICS, Professor Anil Sooklal, says “There’s never been talk of a BRICS currency, it’s not on the agenda”. He adds that unilateral sanctions [on Russia by the West].” has expedited the reality that the "The days of a dollar centric world is over, that's a reality. We have a multipolar global trading system today."
The BRICS have been flirting with expanded local currency use since 2010 when they launched the directly related Interbank Cooperation Mechanism. They are also developing a “BRICS pay” system that would facilitate digital cross-country local currency payments. China is a world leader in adoption of electronic and digital commerce platforms, which may help. There are limitations: Russia and India recently embarked on an effort to use their own currencies in trade - until Russia baulked at accumulating Rupees it worried it would not otherwise be able to use. Since BRICS currencies’ usage in third usage context is limited, these efforts are broadly limited to minimum bilateral intra-BRICS trade levels.
An emerging local currency trade test between China’s Hunan province and Ghana offers a test case for local currency-based trade mechanics. Hunan’s Renminbi hub is trialling a system that pools currency payments among bilateral traders and uses local currency only up to the minimum level of bilateral trade - such that there is always sufficient demand for the lesser-used local currency. This may not lead to reform of the global monetary system but does – uniquely - offer many more small and medium-sized traders a means of engaging in foreign trade - without foreign exchange risk. The model could point to the BRICS’ local currency intent.
There is also a steady push toward the re-monetizing gold. In July, a “Russia- and China-led consortium had settled on gold as the basis of a planned new international currency system separate from the dollar and euro”. Gold was a world economy hallmark until early in the 20th century. Today the world economy is, though, much larger, meaning it would be nearly impossible for gold bullion to equivalently back paper and digital currency today.
There is, though, another option. BRICS currencies could be benchmarked against gold at a specific price or price band, and not to an equivalent dollar rate. If the price of gold were to rise above that, the respective central bank would sell bonds, removing local currency units from the economy to maintain the value. If the gold price fell below the band or price level against local currency, a central bank would “print” new money by buying bonds, thereby injecting cash into the local banking system.
Such a system could be tested within intra-BRICS trade, and a creditor of last resort for any of the participating countries could be the BRICS own New Development Bank. Any balance of payments or currency issues in such trade would hence default away to the basket of currencies of the New Development Bank’s reserves, and overall gold would merely for measurement of each BRICS currency value but not as bullion to back them. Another means would be to underpin that system with gold-backed stable coins. According to former Chinese Central Bank governor Zhou Xiaochun, gold not only offers a stable benchmark and is sovereign-neutral but is also consistent with Mao Zedong’s choice to anchor the Yuan to gold in 1950 as a means of ending hyperinflation.
A BRICS 2023 Johannesburg Initiative as a step toward a 21st century – Africa inclusive - Bretton Woods moment?
A new intra-BRICS valuation role for gold, or any similar move, could make this year’s BRICS summit echo the Bretton Woods meeting of 1944. Then, a new gold-based architecture was established, lasting until the US floated its exchange rate in 1971. Pettis argues that today the US’s role as the “consumer of last resort” is unsustainable, implying that a minimal switch over toward a new gold-standard could mark a shift facilitating American prosperity too. Johannesburg, home of one of history’s largest gold rushes, may, that is, soon mark emergence of a new 21st century monetary era, placing Africa – and the value of its gold – at the active heart instead of the passive periphery of a new global economic governance movement, too.