¶¶Òõ¾«Æ·

SINCE 2008, our world has been in a permanent crisis. There is, however, no consensus about the reasons for the constant presence of an economic crisis. Some think that during the past decade or so there have been several crises; others say that these are only different stages of the same crisis. One way or another, it is obvious that the world’s economy is unstable, and no one can pinpoint when this storm is likely to stop. As we know now, the collapse of the international monetary system of Bretton Woods ended the period of common use of unified exchange rates.

While the unification of exchange rates on an international scale appears to be currently impossible, similar to the return to the gold standard, which is the first international monetary system, noteworthy is the idea of implementing a global currency that could serve the purpose of replacing the US dollar as an international currency. We should remember that the gold standard was characterised by high stability, which helped trade among countries and eliminated any exchange rate fluctuations.

Most economists and policymakers agree that it is time for the world to come together to build new global economic rules, in the same way it did towards the end of World War II in Bretton Woods, NH. In 1944, a group of more than 44 countries congregated at Bretton Woods to establish an international system of finance, trade and development principles, which they hoped would bring economic prosperity. After three weeks of deliberations, it resulted in new trade rules and the establishment of global financial institutions, such as the World Bank and the International Monetary Fund.

The system that came into being worked well until the 1980s. A serious look at the workings of the world economy now seems to throw challenges that did not exist in the 1940s, from climate change to global trade wars to a coronavirus pandemic, all occurring on a scale that Bretton Woods attendees could not have imagined.

Now, as I venture writing about the serious problems the world has been facing in dealing with a broken global monetary and financial system, I cannot but solemnly remember these words by Martin Luther King, Jr in 1967, as he called for an end to the Vietnam War and for lasting global peace and justice. He said, ‘We are faced with the fact that tomorrow is today. We are confronted with the fierce urgency of now. In this unfolding conundrum of life and history, there is such a thing as being too late.’

Taking a cue from this quote, we must admit that it is high time to overhaul the antiquated global economic systems that are fuelling poverty, inequality and climate change on a rapid scale. Kevin P Gallagher, director of Boston University’s Global Development Policy Centre, said, ‘From a scientific perspective, there is the same fierce urgency in the way Dr Martin Luther King talked about civil rights back then.’

Let us look back over a year to grasp the real malfunction of the existing monetary system. Not long after the first gunfire erupted at the onset of Russia’s invasion of Ukraine, Russia fired another multi-pronged shot straight across NATO’s financial bow, first as a reaction to the crippling sanctions and its exclusion from the global SWIFT money transfer system imposed by the West. It moved quickly to protect the ruble by raising interest rates to 20 per cent and imposing capital controls. Then it demanded that all ‘non-friendlies’ (the West) could only use rubles or gold to buy its much-coveted oil. Vladimir Putin then advocated that BRICS economies investigate creating an international reserve currency using the basket of their own currencies.

Finally, he announced the creation of a gold-backed ruble. So, why is there any significance to these moves? It looks obvious from the writing on the wall that some form of change is unavoidable and may be imminent. If we take the statement of Credit Suisse, it says that this new economic order will revolve around commodity-based currencies, which may further weaken the Euro-dollar system as and when the Ukraine war ends. Of course, we must keep in mind that how all these issues evolve and their timing are beyond anyone’s forecasting abilities. But that something will eventually have to replace the US dollar as the sole dominant global reserve currency is beyond doubt.

I am suggesting this after learning that for the past 400 years, global reserve currencies have come and gone. The reserve currencies of Spain, the Netherlands and Britain, a few examples to cite, typically have a lifespan of, give or take, 100 years. As a reference guide for my readers, Ray Dalio’s book Principles for Dealing with Changing World Order is recommended. His YouTube videos can be an extremely helpful guide for general readers to understand the problem.

So, what are the problems we are facing with the US dollar as a reserve currency? Well, in 1944, the US attained its dominant reserve status, which was ratified by 44 nations. The basis of the agreement between these countries was that the dollar would be pegged to gold and all other countries’ currencies would be pegged to the dollar. It was a good arrangement as long as the US kept its gold and was fiscally responsible. But by 1971, all fiscal disciplines had gone out of the window, and US president Richard Nixon effectively defaulted when he decoupled the dollar from gold.

However, the immediate devastation of the American economy was brilliantly handled by Nixon advisers by creating the ‘Petrodollar’ through setting up a relationship with Saudi Arabia, where Saudi Arabia would sell its oil in exchange for the dollars earned being re-invested into the US Treasury market along with security promises. To put it simply, the demand for dollars to trade in what is the biggest commodity in the world has served to prop up the dollar demand despite all the fiscal and monetary abuse that has been heaped upon it.

The world has changed a lot since 1971. China’s emergence as a global economic power rivalling the US (and noting the rise of the BRIC countries recently), America’s profligacy, its fiscal and monetary responsibilities in the post-2008 crisis, the fact that the central bank’s credibility has been laid to waste, and now the end of the globalisation experiment, to name a few. The trend of global trade relationships is evolving as well. Just to note, in the first three months of 2022, trade between the Russian Federation and the BRICS community increased by 38 per cent to reach above $45 billion.

Looking into the frequent weaponization of the US dollar through sanctions and the abuse of the SWIFT exchange system, we can clearly see why so many countries have been looking for alternatives. Today, the US dollar looks like a lame duck currency. It surely still rules, but the world is jockeying for what comes next.

It is widely known that China is leading the efforts to find an alternative financial mechanism by calling for a new international financial order, more so after the Ukraine war started. China has been building its gold reserves, and it is the world’s largest gold producer (some 12 per cent of global production) and the world’s largest gold importer too.

No Chinese-mined gold is allowed to be exported. Its domestic production alone has accounted for 7,000 tonnes over the last two decades. US official gold reserves stand at 8,100 tonnes, although much of it is owned by other countries. And China voluntarily reports its gold reserve status rarely. In 2019, China reported its reserve holding at 1,950 tonnes. Many believe, and for good reasons, that its actual holding is much higher.

Now, to talk about a gold-backed currency system and how it might work, you only need two countries using the system initially. Let us take the case of a trade settlement in May this year between India and Russia. Exporters in Russia, who started trading with India using Indian rupees, have spent $4 billion to buy Indian-made defence equipment and armaments.

Using Russian Bank’s vostro account, where plenty of resources were lying idle, and set up to facilitate trade between Russia and India, the trade was accomplished successfully. Thus, to have a gold-backed currency trading system, you only need two countries to initially use the system. The two countries could create a settlement trading currency (different than a reserve currency) outside the US dollar system.

Recently, Russia indicated that it would like to create a gold-backed stable coin under the working title ‘golden rouble’. According to their research, western countries will have no opportunities to block settlement operations carried out in such a currency since its exchange rate would be ‘pegged to the gold rate’ on the world market and not to the dollar, the euro or, for that matter, the ruble.

Suppose this would occur. What would the rest of the world do? Well, as we know, governments representing more than 80 per cent of the global population have sat on the fence rather than condemn Russia for its war in Ukraine. Economic behemoths such as India, Brazil and much of the Global South are not taking sides, with many wanting to maintain good trading relations with Russia.

I am inclined to imagine a bifurcated global monetary system where non-aligned countries could trade within both the US dollar system and a China-Russia gold-backed system. Of late, the BRICS approach is moving along that path. It is clear that while Americans have been bingeing on digital currencies, global central banks have been on a gold-buying spree. As of this day, the price of gold has reached $2,336 per gram.

Worldwide, central banks have been reducing dollar reserves since 2010. The reserves are down to 59 per cent of total reserves from 71 per cent in 2000. It is open knowledge that even Saudi Arabia is making it known that it will sell oil to China in yuan and is squarely siding with Russia over OPEC oil supplies, despite strong pleading from the Biden administration to increase production.

However, it is also true that most economists think that the ‘stickiness’ of the US dollar in our global system will prevent its fall from grace. Market forces will also have a role to play, no doubt. But if we analyse the efforts underway by the BRICS group as well as the bilateral trading trend among major economies of the South, and if history is a guide on this issue, a change to the arbitrary and skewed system is inevitable, sooner or later.

In a research publication entitled ‘International Monetary System: The Desired Direction of Changes’ by Malgorzata Mikita, the concluding remarks are as follows: ‘Implementing changes is inevitable. While the unification of exchange rates on an international scale appears to be currently impossible, alike the return to the gold standard, noteworthy is the idea of implementing a global currency, which would be an effective replacement for the US dollar as an international currency. SDRs based on the rearranged currency basket that include the currencies of developing countries, could successfully play the role of such currency.’

To most thinking people, it is clear we must think forward, get a new set of principles that are fit for 21st century issues and rewire the system to make sure our economy is geared towards meeting our social goals in a way that can bring broad prosperity, prevent the climate crisis, reduce inequality and populism, and create financial stability. There is no option left for going back on such a global crisis.

Ìý

Humayun Kabir ([email protected]) is a former United Nations official in New York.