Only a Retail Gold Standard Could Dethrone the Dollar
The BRICS bloc is remaining coy about whether a global currency will be on the agenda of its 15th summit, which is set to take place August 22 to 24 in South Africa. Experts from Joseph W. Sullivan to Jim O’Neill to the Council on Foreign Relations warn that a BRICS currency would threaten American economic hegemony. Precedent suggests, however, that dethroning the US dollar with anything short of a full retail gold standard will be difficult.
As students of monetary history, we know that only one of the three major alternatives available to the BRICs bloc would likely last long enough to dent the dollar. That alternative, the retail gold standard, predates the fiat dollar by centuries, if not millennia.
If the BRICS bloc forms a supranational fiat currency like the euro, where demand today is generated by the expected demand for the currency tomorrow, it will surely soon be torn asunder, just as the euro almost was. Unlike the United States, BRICS countries are not a de facto common currency area. They are widely dispersed geographically and share no common fiscal apparatus. Their economies are very different and do not sync cyclically. So, BRICS countries may want to maintain monetary policy discretion, or in other words the ability to raise interest rates to cool inflation or lower them to stimulate growth.
But a supranational fiat currency could survive only if all BRICS national currencies are eliminated, lest one or more members become seigniorage-hungry “money pumps,” as Rhode Island was in America’s colonial period. That tiny colony caused a hyperinflation in New England but thankfully US policymakers learned from the experience and constitutionally banned states from issuing fiat money. That helps keep the US common currency area alive, as does the fact that America’s fiscal and financial systems are unified, a big advantage in terms of macroeconomic stabilization that the BRICS currency, like the euro, would not enjoy.
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Friendshoring gaining traction in central bank reserves
Central banks around the world are gradually shifting away from the dollar. OMFIF’s Global Public Investor 2023 report finds important regional divergences in this trend.
Institutions in Sub-Saharan Africa and the Asia Pacific region are more willing to add to their renminbi holdings compared to their European counterparts. They are less deterred by geopolitics when considering investment in China. These results indicate a possible ‘friendshoring’ of reserves over the next decade, meaning central banks with closer economic, or perhaps political, ties with China are more likely to shift away from the dollar and towards the renminbi. This is not to say the dollar will be overthrown as the dominant reserve currency anytime soon. From our survey of 75 central banks, on average, respondents expect that the dollar’s share of global reserves will fall by 5 percentage points over the next decade, remaining above 50%. On the other side, central banks predicted that the renminbi will rise to 6% of global reserves in this time, from just under 3% now. While little, such movements points to the gradual realignment of global economic power that is shifting steadily away from the US.
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