A friend asked
me: “What country today, besides the United States, could transition to
a gold standard system?”
The technical answer is: any of them. However, that is not what she meant.
What she meant is: what country could do so, without causing unacceptable
levels of economic turmoil?
That is a more difficult question. The basic problem facing a country like
Nicaragua, Pakistan, Cambodia — or China — is that the major
international currencies, such as the dollar, euro, pound and yen, are highly
variable compared to gold.
You can argue – correctly, I would say – that this represents the
unsteady value of these floating currencies, while gold itself is relatively
inert, a constant of stable value. Gold has served this role for centuries.
It’s not gold that is “volatile,” but rather these chaotic
bits of fiat paper.
That may be true, but in practical terms, most other countries can’t
put up with this kind of exchange rate volatility on an extended basis. The
turmoil imposed on the conditions of trade would be too much to bear.
There are a few exceptions: localities for which the “terms of
trade” are not particularly relevant. I would include the oil-producing
states, such as the Gulf States or Brunei. Also, the financial havens like
the Cayman Islands would probably be OK. These countries, due to the nature
of their economies, have a great opportunity to adopt gold standard systems,
where other states cannot easily do so.
Most countries in the world have some sort of currency link, formal or
informal, with major international currencies, to maintain stable trade
conditions. This link might be a fixed system, like Hong Kong’s
currency board, or it might be a more casual arrangement, such as
Russia’s unofficial policy of maintaining the ruble in a stable band
compared to the dollar or euro.
However, if the dollar or euro’s future is not a particularly happy
one, then this currency link will tend to suck these other countries down the
devaluation hole as well. This is what happened when the world’s
premier international currency, the British pound, was devalued in September
1931. It happened again when the premier international currency, the U.S.
dollar, was devalued in August 1971.
If you look at the performance of currencies around the world compared to
gold over the last decade, you can see that it is happening again.
One option for these countries is to introduce a parallel, gold-linked
currency. Most countries in the world have an effective “dual
currency” system already. Business is conducted both in the local
currency – typically some sort of unreliable junk – and also in
some major international currency, such as the dollar or euro. U.S. tourists
have found for decades that they can spend their dollars in shops around the
world. When these countries have one of their usual bouts of currency
turmoil, business tends to migrate more towards the international currency.
In a similar fashion, a government could introduce an alternative gold-linked
currency within their own borders – or, at the
very least, allow a private organization to do so. If the U.S. dollar or
euro, and the domestic currencies linked to them, become unreliable, then
business would naturally migrate to the gold-linked currency. This would be
relatively painless, because each person would make the switch when it was to
their advantage to do so. Rather than causing problems, the parallel currency
would offer a solution.
Several U.S. states, beginning with Utah, have already begun to lay the legal
groundwork for gold-linked secondary currencies in the U.S. However, I think
there is a great opportunity for something we haven’t seen before: a
state-sponsored major international gold-linked parallel currency.
Let’s say that the Russian government, with all the support of the
Russian state, issued a gold-linked parallel currency. The existing, casually
dollar-linked ruble would remain, but the government would also issue and
allow the use of a gold-linked ruble. Perhaps they could call it a
“gold chervonet,” in honor of the
gold-linked currency Russia first introduced in 1701. (One chervonet was worth 3.47 grams of gold.)
However, this could also be an international currency. Let’s say that a
corporation wished to issue bonds denominated in gold chervonets.
Why? Because there would be many ready buyers for such a bond, and thus the
corporation could raise a large amount of capital at excellent rates. This is
why most large corporations around the world raise capital with bonds
denominated in dollars or euros, instead of their low-quality local
Where would they issue such bonds? In Moscow of course. Thus, Moscow would
become the financial center for all issuance and secondary trading of debt
and equity denominated in gold chervonets.
(Reliability of contract law and political stability would be a prerequisite
for Moscow to become such a financial center, however.)
In this way, Russia could provide a path to a world monetary system based on
the gold chervonet, rather than the fiat U.S.
dollar, but without the disruption that would be caused by transitioning the
ruble to gold directly. The existing dollar-centric monetary system would
continue, but Russia would also provide an alternative for anyone who wished
to use it – not only for its own citizens, but for people around the
There would be no official “day of transition.” People would
decide, one by one, when the time had come for them to stop doing business in
U.S. dollars – and other fiat currencies within the dollar-centric
system – and start doing business in gold chervonets,
or some other gold-linked alternative.
Probably, there would come a “tipping point,” when the majority
of business worldwide is done in gold-linked currencies, and there is no
longer any reason at all to use Ben Bernanke’s funny money. When that
point would come is hard to say: maybe in a few months, maybe after ten years
The point is: nobody has to decide when that time comes. It would happen
naturally and painlessly, as the collective decision of people around the
world. Which is the way it should happen, don’t you think?
Russia has done this before: in 1922, the gold chervonet
was re-introduced by the Russian government, as a parallel option to the
floating fiat ruble. Both currencies circulated side-by-side. By 1947, the
ruble was pegged to gold at a rate of ten rubles to one chervonet.
This eliminated any need for two parallel currencies, and the chervonet was retired. It had done its job well.
originally appeared at http://www.newworldeconomics.com/archives/2012/061012.html
on June 14, 2012.)