In a post titled “Building the BRIC wall“, John Butler of the Cobden Centre explores the possibility that the so called BRIC (Brazil, Russia, India, China) nations might move towards a gold standard as the US dollar collapses. Here is my response.
While I share your desirable outcome of a restoration of some form of gold standard (even a flawed gold exchange standard would be preferable to our current fiat currencies), I don’t see the BRICs and similar countries doing so due to a collapse of the US dollar for the following reasons.
- All current governments have spending levels as % of GDP that before the Bismarckian welfare revolution were associated with major wars. Major wars frequently resulted in specie redemption suspension or issuance of fiat currency. Since modern governments operate with spending levels akin to those of major wars, they are compelled to resort to perpetual inflation since this is more politically acceptable than tax increases. Until the spell of Bismarck is broken, a gold standard that prevents perpetual inflation is politically impossible.
- Argentina is the poster child for governments that are incapable of preventing runaway inflation and a collapse of the currency regime. Yet despite repeated failures of various arrangements of fiat pesos, they have never taken the obvious step of adopting a gold standard to remove monetary policy from the political realm. The elites in Argentine thus believe that repeated hyperinflationary blowups are preferable to a gold standard that would mean an end to the welfare state (and the concomitant enormous opportunities for bribery, graft, etc.) The worse case scenario has not convinced any modern government to adopt a gold standard.
- The constant carping about the US dollar is laughable. There is nothing to prevent these countries from unilaterally adopting a gold standard. The refuse to do so due to the welfare argument above and a mistaken mercantilist belief that a weak currency is necessary for a strong export sector.
- The fact that these countries are talking about setting up an alternative to the IMF/World Bank is evidence that their true concern is not with US dollar inflation as such, rather it is the desire to determine their own inflation rates. A true gold standard would render such institutions unnecessary.
- When the US delinked the dollar from gold in 1971, there ensued a decade of economic misery and chaos characterized by high inflation, high unemployment, and multiple recessions. When Fed chairman Paul Volker raised interest rates to ~20% in the early 1980s to tame inflation, gold prices skyrocketed. In fact, at one point, the US dollar would have been over backed by the governments gold reserves. At that point, the US could have painlessly established a gold exchange standard and ended the obviously disastrous experiment with a fiat currency. The opportunity was not taken, the moment passed, and perpetual inflation continued, albeit at a lower level.
I don’t share the author’s conclusion that the BRICs are moving in the direction of a gold standard.