Great forces are in place to change the world in which we have lived since the end of the Bretton Woods Agreement in 1971. These forces cannot be stopped. The leaders of Western democracies are completely unprepared for these coming events. I refer, of course, to the end of fiat currency’s dominance and the end of the fiat dollar’s central role in the settlement of worldwide trade accounts.
Although the coming change may be characterized as one between the Western democracies and the BRICS nations, the real battle is one of ideas between Keynesian economic theory and gold. The winner will be gold.
As Murray N. Rothbard explained in What Has Government Done to Our Money?, gold was never proven to be inferior to fiat money. The gold standard was not replaced by a better monetary system. It was suppressed in stages by the political power of the state in order to satisfy the state’s insatiable need for money–first to make war and then to corrupt the people via welfare. The result, of course, has been never-ending wars, creeping expansion of the welfare state, unsustainable public deficits, and accelerating debasement of the currency.
One may conclude that the collapse of the fiat dollar and all other fiat currencies is inevitable; however, the process was accelerated by the Western sanctions on perceived enemies like Iran and finally Russia. These so-called “Russian Sanctions” included freezing Russian owned assets in the West and forbidding Russia from access to the international dollar trade settlement messaging system known as SWIFT. Led by Russian monetary expert Sergey Glazyev, Russia has been working with the BRICS nations (Brazil, Russian, India, China, and South Africa) to introduce an alternative international trade settlement system based on commodities, which would certainly include gold if not exclusively gold.
Putting “Paid” to Keynesian Fallacies
The BRICS summit in Johannesburg, South Africa later this month is expected to include an agreement on a first step toward the twin goals of a sound settlement system that cannot be manipulated by one country for its unearned benefit and contains guarantees of non-interference into each member’s internal political system. Already dozens of both non-Western and even some Western affiliated nations are attending with great interest.
Although escape from Western (American) dollar hegemony is the main purpose of the meeting, an inevitable consequence of introducing gold into the trading system is to expose the main fallacy of Keynesian economics; i.e., the elevation of aggregate demand to prominence in a nation’s economy rather than production. This is Keynes’ now famous shunning of Say’s Law in his General Theory of Employment, Interest and Money, . Keynes was required to ignore Say’s Law of Markets in order to hide his theory’s internal contradictions. As put succinctly by Emile Woolf, “Keynes endows the concept of ‘aggregate demand’ with god-like status while disregarding ‘production’-the only means of satisfying it.” Jean-Baptiste Say shows that production is required in order to enjoy the benefits of consumption. On the face of it, it is hard to believe that anyone would believe that production either isn’t required for consumption or that it magically appears. Yet, this rather upside down theory appealed to politicians for obvious reasons; i.e., it gave them carte blanche to spend, spend, and spend some more, all with money created out of thin air by the central bank. Rather than “economize” and prioritize spending that was absolutely necessary for the benefit of the entire nation, politicians were told by Keynes that it was their duty to spend if only to pay people to dig holes and others to fill them up. Yes, this is an actual recommendation from Keynes’ General Theory.
Basics of a Gold Settlement System
The new international trade settlement system that likely will emerge from the BRICS conference will require settlement in gold. A possible mechanism has been outlined by Alasdair Macleod of Goldmoney.com, which I have included at the end of this article. The benefits of the new system will become obvious to every nation, not just the BRICS members. The political benefits are that no one nation can control the system. The economic benefits are that government spending will be minimized so that resources can be allocated to production rather than state aggrandizement. An important point made by Macleod is that over time the gold settlement system for international trade will expand into members’ internal monetary systems. In other words fiat currencies, which can be inflated/debased by governments, will be thrown on the ash heap of history. They will become “barbarous relics” instead of gold, as Keynes predicted in 1924.
A member can expand imports only by expanding exports. This puts market pressure on member governments to reform their internal economies in order to increase production. Consumption can occur only via coterminous production. Put another way, exports are the price a nation pays for imports. Imports enrich a nation, and exports are its cost.
Nowhere in this real economic and monetary system is there a need for artificially increasing demand, per Keynesian orthodoxy. In fact to do so would be counterproductive, because gold would drain from the nation’s gold settlement account and imports would be suspended. This is an honest and simple trading system that cannot be manipulated by any member for its benefit alone. Either the member has the gold to settle its trading account or it does not. Therefore, the system encourages sound economic practices within its members’ individual economies. Printing money, excessive and unnecessary regulations, excessive taxation, and excessive government spending do nothing to aid a member’s ability to engage in trade. Nations like the US who have huge welfare obligations and who have politically connected industries that do not add to the nation’s capital base will struggle and be passed by nations that are more nimble and less foolish. Having lots of nuclear weapons will be irrelevant and having bases around the world will be liabilities rather than assets.
Yes, a big change is coming, and nothing can stop it. Funding the Western-style welfare/warfare state will be unsustainable. Retching changes will be required, and powerful, politically-connected groups will fight their privileges to the bitter end. But the options are either adapt or become a backwater irrelevancy.
Possible Gold Settlement System by Alasdair Macleod
Credit must take its value from something else. We assume that commercial bank credit takes it value from bank notes, which is a central bank’s credit. Equally, if you and I agree an exchange for future settlement, we will value the settlement in credit, either in cash notes or bank credit. Each form or pool of credit is quite distinct, with all credit taking its value from another pool of credit.This is why gold almost never circulates in settlement of transactions. But for the whole system of credit to be stable in its value it must be attached to legal money, which for all currencies is gold, despite governments not permitting central bank credit to be redeemable in gold today.
My plan draws on the fact that in a gold-backed currency, gold is almost never used in settlement, settlement being in bank notes or more commonly commercial bank credit, both of which derive their value from gold. The objective, therefore, must be to devise a system of credit firmly tied to gold, without gold actually having to change hands. The result is a plan drawing upon elements of the Bretton Woods system, whereby exchanges of the gold currency for physical gold can only happen between central banks withdrawing or adding bullion from or to the New Issuer.
Accordingly, I suggest the following:
- A New Issuer is established for the sole purpose of taking in gold, which is earmarked in designated vaults, against which it issues credit denominated in gold by weight (i.e. a gold gram) in the ratio of 1 unit to 2.5 units of currency (credit). This is designed to ensure Sir Isaac Newton’s ratio of gold to currency is maintained at 40% backing, while boosting the reserves of a participating central bank reallocating some or all of its gold reserves to the New Issuer. These gold currency reserves are recorded as an asset on the balance sheets of participating central banks, enabling them to issue credit denominated in the gold currency to commercial banks which have an account with them, and for the purpose of extending credit into the settlement system. This credit extension is recorded as a liability on the central bank’s balance sheet, and an asset on that of the commercial bank.It ties in the pool of central bank credit initially created by the New Issuer, into the pool of commercial bank credit used to finance cross-border trade, including the acquisition and sale of commodities.
- A central bank can only submit gold currency units for redemption to the New Issuer to the extent that it has previously deposited bullion with it in the 1:2.5 ratio.
- The credit denominated in gold is notinitiallyintended for general circulation. Commercial bank credit denominated in the new currency will be created in the normal way for trade finance and cross-border sales and purchases of commodities. In any event, the whole system of credit linked to gold depends on genuine demand for it, unlike fiat currency which is debased by governments.
- Commercial banks issuing this credit must be members of a clearing facility, which will also include central banks as members. Note that the New Issuer is not involved in any clearing activity: it simply runs a ledger recording the initial credit created in favour of a depositing central bank, and of any subsequent amendments based on additions and withdrawals of bullion by individual central banks.
- Importers and exporters obtain trade finance denominated in the trade settlement currency from commercial bank members of the clearing facility, created in the normal way.
- Since commercial bank credit ends up circulating locally, a government will have to decide whether to introduce exchange controls limiting its circulation to importers and exporters to “protect” its own fiat currency. Practicalities suggest that fiat currencies will be eventually displaced by the new gold currency units because of the stability of its value.
- Only central banks registered with the New Issuer have the right to demand gold in exchange for the gold currency from the New Issuer. This ensures that the value of the new gold currency remains firmly tied to gold and is the sound basis for the value of credit issued by commercial banks for the purpose of trade finance.”
Of course, Glazyev may have other ideas.