Single currency of the BRICS countries, backed by gold - myth or reality?

ANALYTICS  15 April 2024 - 10:01

From time to time, in the press of the BRICS member countries, as well as outside it, headlines appear in the spirit of “BRICS plans to launch a gold-backed currency” and the like. The main goal of such a measure is considered to be to simplify trade rules and reduce dependence on the dollar and euro in international payments.

Below we will try to find the answer to how realistic this measure is and how soon we will see the BRICS currency pegged to gold

Should the currency be pegged to gold?

This question very often circulates in the media field, especially in Russia, where the memory of the royal gold ruble is still very much alive in the minds of the population. Russians associate the beginning of the 20th century primarily with reforms, trade in Russian grain around the world and with the royal gold ruble as a respected international means of payment. However, the gold standard has fundamental problems and therefore serious economists are not considering a return to it. There are currently no currencies pegged to gold or any other commodity. Therefore, in countries that have their own currency, the money printing machine is essentially unlimited - only by paper and ink.

There are two main reasons for this:

1. Gold today is an exchange commodity with a volatile price, so if the currency is tied to gold, it will become LESS stable, no matter how many would like the opposite.
2. The gold standard is the main cause of the Great Depression in the United States. Because people preferred to keep their money in cash, the dollar, which was tied to gold. Because of this peg, it was impossible to print “cheap money” to fuel demand. As a result, we got deflation, which intensified in a spiral: there is not enough money → demand falls → the price of products decreases → companies cut costs and fire workers → the unemployed live on savings → there is not enough money...
Inflation, or more precisely, controlled inflation, is actually good for the modern economy, because it allows you to warm up the economy after the crisis. Therefore, it is unprofitable and unnecessary for countries to return to the gold standard.

Implementation option

The single BRICS currency may appear in the form of an index currency linked to a basket of national currencies of the BRICS countries, as well as to the gold and foreign exchange reserves, trade balance and the size of the public debt of these countries. But the problem here is that countries are rarely able to agree on such complex systems among themselves, even in a situation where the issuer of the US dollar sits quietly and does not try to prevent this in any way. Since there is a clear economic imbalance in favor of China, it will most likely put pressure on its currency being the reserve currency.
In principle, all this can be discussed for a very long time; it will be years before real steps are taken in this direction, and decades before something like this can be created. In the meantime, everyone will verbally bury the dollar, but in reality use it for reserves. 

What can replace the dollar?

Many countries today understand the need for de-dollarization. However, things have not yet gone further than talk, and even the latter calm down as soon as the crisis period in the world gives way to another economic growth.

Russia has advanced the furthest in this direction, reducing the share of the dollar in its international payments by 35% and practically making it equal to the ruble in this indicator. However, what works on the scale of an individual country (and with not the largest share of the world economy) is unlikely to work at the global level.

Is there an alternative to the dollar? Yes, and this is the Chinese yuan. However, there are some “buts” here too. The fact is that the Yuan is not as freely convertible as the dollar or euro. More importantly, it is almost impossible to obtain in cash. That is why the yuan cannot fully replace the dollar. Another reason why the yuan is unlikely to take the place of the dollar, is that its exchange rate is centrally regulated to give Chinese goods an advantage in the competitive market. It is highly unlikely that the Chinese authorities will abandon such a monetary policy in the nearest future.

Caliber.Az