Big Revolution In Currencies Soon? maybe, maybe not.
Should the market be on high alert ahead of the upcoming BRICS conference in Johannesburg?
Money makes the world go around. Like language, money is so ubiquitous to the human experience that imagining a non-monetary world, like a non-linguistic one, is almost impossible. As with talking about language, when one starts to talking about money, what it is and how it functions, one almost immediately begets confusion, controversy and contention.
On the 22nd-24th August, the BRICS nations (Brazil, Russia, India, China and South Africa) and other interested parties are holding a meeting in Johannesburg where it seems money is on the agenda. Quite what form the discussion will take, what decisions will be made and what the roadmap for implementation will be is still a matter of conjecture.
One thing is clear; although various South African sources have denied that de-dollarisation is the issue, any suggestion of an alternative currency or of trading more in local currencies will be weighed in the context of the dollar and particularly its role in international trade1. Whatever the case, all such discussions amount in some way to a theoretical and practical assault on monetary orthodoxy and convention.
When Luther nailed his protesting theses to the door of Wittenberg cathedral in 1517, he initiated a religious reformation that split the Christian church in two, a process which resulted in over a century of war and bloodshed. Others, notably the Hussites and the Lollards, had challenged the orthodoxies and practices of the Roman church before, but with Luther, the time was right - various factors, not least the advent of the printing press, came together to make this protest the one which worked.
Is the world monetary system about to face its reformation moment? Much has been made of the futility of challenging the dollar in the past. In his 1991 book ‘The Rhetoric of Reaction’, A. Hirschman described the defence of orthodoxy as revolving around the themes of perversity, futility and jeopardy with respect to challenging the status quo.
If one reads the musings of Lord Reid, the former Goldman Sachs economist who actually coined the acronym BRICS, one gets a sense of similar forces of reaction at play, some of them clearly justified in the light of previous failures to challenge the dollar.
In an FT article ahead of next week’s BRICS conference, Lord Reid is quoted as describing the creation of an emerging market trading currency as “ridiculous”, adding, “They’re going to create a Brics central bank? How would you do that? It’s embarrassing almost.”2
Pointing out correctly how a single currency would not work for five diverging economies (shh, don’t mention the euro and its 20 diverging economies), he suggests that at best it would be an act of “powerful symbolism” and little more.
Lord Reid does go on to add that many emerging markets do not benefit from the current global trading system, not least those countries who become unduly reliant on the US dollar as the currency of choice for international trade, and who often build up dollar-denominated debt as a result of import and export imbalances within their own economies.
If the BRICS decide to favour their own currencies rather than the dollar for trade (this is apparently the topic for discussion at next week’s conference), then this might mean less exposure to the dollar for the countries concerned, but those countries who export more than they import would immediately be left with currency balances in their trading partners’ currencies rather than in dollars. The benefit of the dollar is that it’s the global reserve currency, at least for now. Russia is already complaining that after a year of increased oil trading with India, it has been left with large rupee balances with which it can do very little3.
The de-dollarisation debate has become a focus in the last year and a half following the US decision to sanction Russia’s dollar reserves following the latter’s invasion of Ukraine. There have been wider and deeper concerns about the dollar as a reserve currency which go back to the global financial crisis in 2008, and these concerns over America’s fiscal probity, particularly in an age of inflation and large fiscal deficits, are not assuaged when ratings agencies such as Fitch downgrade the US from AAA status.
Anything can play the role of money, so long as people treat that thing as money, and that primarily means using it as means of payment and exchange. In prison, cigarettes have often fulfilled that role (the photo above from The Shawshank Redemption shows bets being settled in smokes). In this respect, the dollar isn’t necessarily that special, although the network effects of adoption clearly bring their own benefits.
Russia seems to be a key player in the urgent drive towards a new BRICS trading currency, and much of its communication with respect to this comes from the economist Sergei Glasyev, the minister in charge of integration and macroeconomics for the Eurasian Economic Union. It seems that his view of a trade settlement currency is one backed by commodities, an understandable position given Russia’s mineral and resource wealth.
Maintaining baskets of currencies or commodities is tricky. The euro replaced the 12 original accession countries’ currencies in 1999 for this reason. When considering the issue of stable currencies backed by commodities in the 1930s, John Maynard Keynes also realised the problem of balancing baskets of commodities. the IMF’s special drawing rights (SDR’s) are effectively a currency basket system, but it isn’t tradeable due to its complicated structure and constantly varying currency values as the levels of individual currencies ebb and flow in the FX markets.
There are some suggestions (from Glasyev amongst others) that going forward, trading balances between BRICS member countries may be valued and ultimately settled in gold. This would be far simpler than using a bigger commodity basket, and might explain the thirst of many BRICS central banks for buying physical gold in the past year or so.
What this would mean for the price of gold is as yet unclear, but it’s fair to assume that if gold is to be used as money to settle trade rather than just sitting in central bank vaults, then a rise in demand for gold ought to lead to a rise in its price. This is particularly true given that gold as money (rather than as jewellery for example) would mean far greater demand for its physical ownership, effectively revaluing it as a monetary asset again.
Whatever the BRICS proposal, it seems the first iteration will fall well short of the classical gold standard or even the gold exchange standard of the inter-war years. In its long monetary history, Britain has gone back to gold twice, once in 1817 and again in 1925, on both occasions following wars. Both events were extremely deflationary and destabilising - the photo above is of Britain’s only general strike, that of 1926, itself a direct consequence of the return to gold. The Peterloo massacre of 1819 followed the readoption of gold just over a century earlier.
While using gold as money again has deflationary precedents, there is also the possibility that a rise in the gold price could push other commodity prices (notably oil) much higher, and this would of course be inflationary in the short term. So while the BRICS announcement could just be more talk and little action, it has the potential to cause considerable market volatility, especially in the context of de-globalisation and the growing conflict between the US and China.
Getting away from the dollar is one thing. The problem Lord Reid alludes to in the FT article referred to above is an altogether much deeper and older one, and one which is essentially blind to whether money comes in the form of dollars, ciggies or gold.
At the last big monetary discussion at Bretton Woods, New Jersey, in 1944, John Maynard Keynes correctly identified the problem of global trade as one of perpetual imbalances and the adverse consequences that this causes. Some countries run deficits, others therefore have surpluses, and it is domestic fiscal and monetary policy that drives this. For Keynes, these permanent imbalances destabilised global trade and were the root cause of geopolitical tension and ultimately war.
His suggestion at Bretton Woods was a kind of use-it-or-lose-it system where perpetual surplus countries would eventually lose their surpluses in order to provide long-term global economic stability. It was really a clever way of mimicking the classical gold standard which, due to the international flow of bullion, was self-correcting in terms of trade balances.
Nothing so far in the BRICS proposals, be they local currency, gold or anything else, seems to address this issue - at least yet. Monetary history tends to move very slowly, so it’ll be interesting to see if the BRICS story is just more jaw-jaw or a meaningful effort to change the global monetary set up - a real bar-bell event in terms of revolution or nothing done.
S’thembile Cele & Monique Valek, BRICS to discuss accelerated use of local currencies at summit, Bloomberg, 14/08/2023.
Arjun Neil Alimm & Joseph Cotterill, Brics creator slams ‘ridiculous’ idea for common currency, Financial Times, 15/08/2023.
Aftab Ahmad & Swati Bhat, India, Russia suspend negotiations to settle trade in rupees, Reuters, 04/05/2023.