Can Gold Replace the Dollar as the World Currency?
Author: Dmitry Skovorodtsev
Predictions that the role of the dollar in the world financial system will decline and that gold will become a new choice for foreign exchange reserves are becoming more frequent. People are even discussing the idea of returning to the gold standard and "gold settlement" between countries. How realistic are these scenarios? What currently hinders gold from becoming the global main currency again?
A survey by the World Gold Council (WGC) of 73 financial regulatory agencies shows that the proportion of the dollar in global reserves will decline, while the proportion of gold will rise. The study points out: "The majority of respondents (73%) believe... that over the next five years, the proportion of the dollar in global reserves will decline. Developed countries and developing countries agree on this view." The decline in trust in the dollar naturally raises the question: what will replace it? Can gold not only serve as a reserve asset but also be used for monetary settlements?
How Gold Made America and Britain Wealthy
For centuries (from ancient coinage to the gold standard in the 19th century), gold has not only been a measure of value. Independent of government political will, gold has ensured trust in currency and helped curb inflation.
However, tying money to gold not only brought stability but also caused conflicts. As early as ancient Rome, gold shortages became a cause of economic recession: precious metals continuously flowed to India and China due to luxury trade, weakening domestic currency circulation.
In 17th-18th century Europe, similar problems arose: population growth, increased agricultural productivity, and the development of handicraft industries drove significant economic growth, but the amount of gold and silver coins in circulation could not meet settlement needs. At that time, mercantilism tried to keep gold within the country by restricting imports and stimulating exports.
Another way to increase economic monetization was the issuance of paper money, whose credit was based on the promise that paper money could be exchanged for gold. Since some bills circulated in the market without being redeemed, the amount of paper money issued could exceed the gold reserves, providing the corresponding amount of money for a growing economy. However, at the same time, governments gained the ability to finance budget deficits or stimulate demand through printing "excessive" paper money, which could lead to depreciation of paper money against gold if done excessively.
In addition, the inflow of gold into the economy could also enhance monetization and promote economic growth. For example, the American economy was strongly driven by the California (1848) and Alaska (1897) gold rushes in the 19th century, making the U.S. the largest economy in the world by the early 20th century.
For Britain, the Anglo-Boer War from 1899 to 1902 was also a means to control the Witwatersrand gold mines, increasing the amount of gold in the British economy before World War I. This was a necessary measure due to the enhanced economic independence of the dominions. Previously, the British Empire adopted perhaps the most ingenious method of gold inflow: the pound did not circulate in the colonies, and colonial currencies did not circulate in the mother country. As a result, British officials, officers, and businessmen who made their fortunes in places like India had to exchange their money for gold and deposit it in London banks when they wanted to bring it back to Britain. This inflow of gold into the mother country promoted Britain's economic prosperity during the Industrial Revolution.
The Challenges of Returning to the "Gold Standard"
Today, the idea of returning to the gold standard faces a series of almost insurmountable problems. First is the physical limitation - there is simply too little gold on Earth. The amount of gold held by central banks and international institutions is insufficient to support the scale of today's world trade and currency circulation.
For example: at a price of $3,450 per ounce, the value of all central bank gold reserves (about 36,000 tons) is approximately $4 trillion, accounting for about 4.0% of global nominal GDP or 2% of purchasing power parity GDP. To make gold theoretically replace the dollar, its price would need to rise 8-10 times.
In addition, basing currency entirely on gold completely excludes active monetary policy. Central banks lose the ability to finance budget deficits or stimulate demand, which although makes the economy more stable in the long term, also makes it more susceptible to shocks. The example of the Great Depression in the United States vividly demonstrates what consequences can arise during a crisis when strictly adhering to the gold standard.
Finally, there are political obstacles. A substantial increase in the price of gold would mean that the country with the largest gold reserves would suddenly become wealthy overnight, while those countries with reserves in the form of currency and securities would suddenly find themselves at a disadvantage.
The United States is the official holder of the largest gold reserves. In Fort Knox, West Point Mint warehouses, Denver Mint in Colorado, and the New York Federal Reserve Bank warehouse, there are 8,133.46 metric tons of gold belonging to the U.S. Treasury, accounting for 74.96% of the U.S. gold foreign exchange reserves. However, Trump's proposal to re-audit the gold reserves at Fort Knox is not without reason; doubts exist regarding the actual amount of American gold there. These warehouses also store large amounts of gold belonging to international financial institutions (IMF and World Bank) and other central banks of various countries. Among the 25 countries with the largest gold reserves, 43% of the gold is stored in the United States.
The total gold reserves of G7 countries are nearly three times that of BRICS countries, while the combined purchasing power parity GDP of BRICS countries exceeds one-third of that of the "Group of Seven." This means that if the gold standard were reinstated, the primary beneficiaries would still be Western countries.
Return of Gold or Transformation of International Settlements?
In summary, the possibility of a full return to the gold standard in the next ten years is extremely low, but the role of gold in the international economy will undoubtedly increase. In a world where the dollar loses its neutrality and paper money is considered a political tool, gold is becoming a new "anchor of trust."
One possibility is that gold will not be the sole world currency but will only serve as an inter-state settlement tool. In this case, trade between nations is settled through clearing offsets, with payments made only for the resulting differences. This requires stricter capital flow controls and a comprehensive restructuring of multinational corporations' operating models, making them actually a network structure, with each link closely tied to its respective jurisdiction. This goes against the spirit of globalization but conforms to the trend of economic regionalization in recent years.
This approach reduces the demand for massive gold reserves but still does not make gold sufficient to support settlements (or its price would need to rise significantly).
Another scenario may involve creating a multi-currency basket, with gold being just one component. Similar ideas formed the basis of the IMF's Special Drawing Rights (SDR), but now may involve closer ties with gold, especially if China or BRICS countries decide to take this step in creating their payment systems.
However, gold is not the only option to ensure the actual value of currency. The possibility of using energy resources as the foundation for international currency has been discussed many times. Since the prices of oil, natural gas, and electricity fluctuate relative to each other, the use of an energy "currency" basket as the basis for new international settlement units may be involved.
Original article: https://www.toutiao.com/article/7517182043046838847/
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