This thread will surely be visited only by people with some knowledge economics, or at least the history of modern currency system. /s
With that out of the way, let me tell you some harsh truths. Gold standard fell apart because it was a bad way to manage currency in a modern industrialized society. The Great Depression was effectively the final nail in it's coffin. Bretton Woods was essentially vehicle for US dollar dominance, and ended when in the 70s US government realized it wasn't worth the effort.
But sure, let's go back to that. Given our, and by that I mean Tech community, track record of monetary decisions that can only work out great. Let's "do our own research" again.
As if it's only happened once in history... It's cyclical. Currencies start out pegged to gold to attract initial users. Then they become loosely defended with gold, and then they publicly decouple and become fiat. Those in power want to have more power and leverage, as usual. Nothing "wrong" so far. Then they overprint and lose credibility/stability. And the cycle repeats somewhere else.
(I think that was from Dalio's debt series.)
I'm curious how you'd start this new currency, if not backed by gold? BRICS don't want to depend on USD, and gold is commonly the denominator everyone can agree on.
> I'm curious how you'd start this new currency, if not backed by gold? BRICS don't want to depend on USD, and gold is commonly the denominator everyone can agree on.
Find a country and a currency that appears to be the most stable.
In the BRICS that's really only China, or maybe India. Brazil is something of a basket case at times, India is catching up fast but has its own challenges, Russia is actively collapsing itself in Ukraine, and S. Africa is a borderline failed state.
China is the only country of the group I'd truly call stable, and the other BRICS pegging a currency to the Yuan is about the only other option besides gold, or pegging to the Euro / USD / Yen.
Never gonna happen either, since India has a direct, albeit low-key-ish rivalry with China, and Russia has no reason to play ball when their weaker currency translates to better resource exports.
No, this isn't because 'it's cyclical', this is a simplistic explanation. The issue is that this currency will probably be manipulated. And while central banks issued currencies can be protected by central banks themselves (at a cost, when they are reactive enough), it's impossible to protect gold from manipulation. Especially if US and EU authorities don't care, or pretend not to. And now, some want to peg a currency to gold prices? It's like pegging a currency to the bitcoin, except with a bitcoin on a blockchain that non one can audit.
Look into how France broke the gold standard (without really meaning to I heard from my grandfather, the goal was to pressure the US and protect the 'new franc')
Exactly. We've been here before. People refuse to learn from history. The gold standard has failed repeatedly and caused all kinds of problems, including wars, throughout history.
Industrialized societies eventually realized that your currency should be backed by your industrial activity. "Industrial activity" used to be measured by manufacturing output, but in the 80's countries such as the United States, who was losing manufacturing to Japan at the time, redefined "industrial activity" to include services, especially financial services. I'm not arguing there aren't issues with these definitions and how they're applied, however they're all preferable to precious metals.
In an industrialized society, where your rate of digging gold out of the ground is fully decoupled from how well the rest of the economy is doing, you will be constantly adjusting the exchange rate. That will sooner or later lead to speculation on future adjustments blowing up your gold standard.
>> Gold standard fell apart because it was a bad way to manage currency in a modern industrialised society
Gold market is heavily manipulated by big player such as Chase, or if you go back far enough by city state like the Venetians.
Having a gold back currency is just a insurance against the central banks to not just print money too erratically. If you look around the US, several states have already created bullion repositories. Not to mention countries such Russia, China, Germany have being repatriating gold for quite some times now.
> Gold standard fell apart because it was a bad way to manage currency in a modern industrialized society
Source? From what I understand, the gold standard felt apart in WW1. Some also indicate WW1 being the first worldwide conflict because the war machine was no longer restricted by what's in the government's coffers, so you can go all in and basically have future generations pay for it (with massive inflation if you lose, but if you win you have the spoils to repay the cost of the war, and then some)
And leaving the gold standard is also viral: if your enemies can print money and pay for enormous amounts of soldiers and ammo in the short term, either you adopt it to stay apace or you get overwhelmed.
AFAIR Germany was the first to abandon the gold standard, and all European nations followed immediately thereafter. Then losing the war explains all the events leading up to the rise of Hitler.
There were plenty of examples of countries devaluing their currency before World War I. No one was ever really on the gold standard, that was just what the governments were willing to exchange it for at times. The government could always alter the exchange rate or simply stop exchanging it for gold even if they were "on the gold standard." (Look at the Confederate dollar for an example). Also, the only reason World War I is the first World War is because we called it that. There were plenty of wars which involved multiple continents before that. For example, the Napoleonic Wars involved every continent but Antarctica.
Example such as? Because the big players like Europe and USA all did during WW1, then got back to the gold standard just after the war for a few years until John Maynard Keynes convinced everyone that it was a bad idea, and we're still debating whether that's the case to this day.
I don't recall the specifics but only the USA was in a weird fiat-gold hybrid until the 70s as before that they guaranteed they would buy gold at a specific price in $
> From what I understand, the gold standard felt apart in WW1.
Formal gold standards were only introduced in the 1870s. No matter where exactly you put the end date, it only existed for a shockingly short time frame, and has very little relation to whatever you want to call "traditional" monetary systems.
> Some also indicate WW1 being the first worldwide conflict because the war machine was no longer restricted by what's in the government's coffers, so you can go all in and basically have future generations pay for it (by massive inflation if you lose, but if you win you have the spoils to repay the cost of the war, and then some)
I can see why this line of thinking appeals to some people with rather creative interpretations of fiscal policy… but no, this is how wars have always been financed in heavily monetized societies. You always had the option of re-minting your 100% silver coins (or gold coins, for that matter, but gold rarely ever had the special status "gold standard extremists" ascribe to it) into 99% silver coins… or 90%.
Or 25%.
Or even less than 10%.
You bet that future generations were regularly crippled by this kind of ridiculously massive inflationary shocks. The Ottoman and Western Roman empires never recovered from debasing their currencies so hard.
And while the British and French Empire also didn't survive their takes on currency debasement for long (Germany didn't have much wealth left to turn into war spoils, and the other central powers didn't even exist anymore – they had abolished the gold standards before Britain/France, from what I can tell, by a month or two), the US did fabulously well after both WW1 and WW2, and that's without trying to plunder anyone.
And then started abandoning it in the 1930s during the Great Depression. And the sooner a country (re-)abandoned it the sooner it started to recover in the 1930s. France was the last country to leave it:
> In the end, recovery from the Great Depression does not begin until countries give up on the combination of the Bagehot Rule and of commitment to sound gold-standard finance. Those countries that have central banks willing to print up enough money so that people are willing to spend it--it is when you adopt such policies that your economy begins to recover. If you don’t, you become France, which sticks to the gold standard all the way up to 1937, and never gets a recovery. When World War II begins, Nazi Germany’s production--equal to France's in 1933--had doubled between 1933 and 1939. French production had fallen by 15%.
But of course. Economy is a zero-sum game. You can't get massive amounts of money on "loan" by abandoning it, and expect that the economy keeps chugging along if you readopt it. The war has to be paid somehow, and abandoning the standard was the only way of each country giving themselves a loan to participate in WW1.
This is exactly what we are seeing today: we pulled money out of thin air to pay for the COVID disruption to the economy, and now we have massive inflation. And you can't blame the gold standard for it this time.
I have yet to hear someone argue why the fiat system is preferable to the gold standard without parroting Keynes or using history as proof of the validity of the choice. Macroeconomy is complex but also very simple: either you can pay for something with money you have today, or you create debt, which you will eventually have to pay, somehow.
> This is exactly what we are seeing today: we pulled money out of thin air to pay for the COVID disruption to the economy, and now we have massive inflation. And you can't blame the gold standard for it this time.
There was deflation in 2020 for a while (due to the pandemic). The 'high inflation' in 2021 was because of base effects:
Inflation went high in 2022 partly because of energy costs, specifically fossil fuel energy (thanks Russia), at least according to Canadian CPI data (where I live):
> I have yet to hear someone argue why the fiat system is preferable to the gold standard without parroting Keynes or using history as proof of the validity of the choice.
Because the gold standard does nothing to produce stable prices:
> The price of milk is way more stable over the last 18 years [up to 2012] when priced in dollars. In gold, we'd have gone from major inflation in the 90s, to deflation throughout the 2000s.
> So gold doesn't work for global purposes, and it doesn't even make the economy more stable.
While reducing flexibility to deal with economic cycles:
> In the end, recovery from the Great Depression does not begin until countries give up on the combination of the Bagehot Rule and of commitment to sound gold-standard finance. Those countries that have central banks willing to print up enough money so that people are willing to spend it--it is when you adopt such policies that your economy begins to recover. If you don’t, you become France, which sticks to the gold standard all the way up to 1937, and never gets a recovery. When World War II begins, Nazi Germany’s production--equal to France's in 1933--had doubled between 1933 and 1939. French production had fallen by 15%.
And why shouldn't people "parrot" Keynes? He was right after all. And why shouldn't the historical record be used as proof / evidence? It shows various economic policy experiments and what works (stimulus spending) and what doesn't (expansionary austerity; cutting taxes pays for itself, cf. "Kansas experiment").
Would you complain about people "parroting" Einstein and his General Theory?
The concept doesn’t really make any sense on its face. Gold is gold. A kilo of gold is worth the same in the United States as in China or India. So when you look at the nations backing this—the BRICS countries, plus a few other nations that are mostly steaming dungheaps or, at best, oil banana republics—the obvious question is why would they be pushing a standard based on a universal commodity rather than anything tied to their economies? The answer is obvious, of course. Their economies, even combined, are simply in no place to compete on the world stage. Pushing gold as a standard makes them seem stronger than they are, in an attempt to wean the world off dependence on dollars and euros… but if gold were so much better, as you say, we’d still be on it.
I'd echo this and add that I can't really see a BRICS "gold-backed" currency being trusted. Let's say that they launch this currency and 1 BRICSY == 1 centigram of gold (approximately $0.63). Therefore, if I have 100 BRICSY in my pocket, I can show up at the central bank of Russia or Brazil and trade it for 1 gram of gold.
Except that there would be huge incentive for any country to cheat. If I'm Russia, why not print 2x more BRICSY notes than I have gold for? Why not print 10x more. What are the odds that everyone wants to exchange their BRICSY notes for gold all at once? Not only that, if the notes are identical from country to country (like the Euro), if I run out of gold, I could simply say that you need to visit a different central bank to claim the gold. I could claim it is still backed by gold, but that the gold is in a different central bank.
In fact, this could be a brilliant plan for one of the central banks to essentially rob the others. Let's say each country starts with the same amount of gold reserves and each country prints the exact same number of BRICSY notes. Let's say I'm Russia and over the next few years I start trading my BRICSY notes for gold from the other 4 countries. I do it slowly and I launder the activity so that it seems like normal activity. Now I've taken 25% of the gold reserves of China, India, South Africa, and Brazil. A year later, China says "we'd like to exchange a bunch of BRICSY notes for some gold Russia." I say, "sorry, we've decided to discontinue the BRICSY currency."
Maybe each BRICSY will be printed with the country of origin and only convertible to gold at that country of origin. That would prevent the former from happening, but it would also mean each BRICSY would have a different value. I'd value a Chinese BRICSY higher than a Russian BRICSY. Even if you trust both countries equally, the odds I (as an American) can convert a BRICSY to gold from Russia is way lower. A BRICSY from Brazil seems safer than from China in some ways given that US-Chinese relations are a bit rocky on the economic side of things and Brazil-US relations just don't have the same geopolitical turmoil.
Over the past year, we've seen huge cryptocurrency crises with stable coins and whether they were actually backed 1:1 with USD. Given some of the countries on the BRICS list, I don't see how people would be inclined to trust their system. Even if one thinks the gold standard is good (it isn't), it still requires you to trust that the country isn't lying about its gold reserves. I don't think the gold standard is a good system, but it feels like gold-standard stans need a phrase akin to "Not your keys, not your coins" - maybe "not your metal, not your gold." People complain that a country could do something bad with fiat currency (which they can). There's nothing stopping a country from printing too much fiat currency. However, there's nothing stopping a country from printing too much gold-standard money either.
Again, we've seen this with stable coins. They can mint way more stable coins than the USD they hold in reserve because most people won't be converting them into USD. Converting cash into metal is an even more arduous process and carries substantial risk (like the metal being stolen or lost). A government could probably keep less than 10% gold reserves and no one would be the wiser.
The US government is far from perfect and the dollar isn't perfect. At the same time, I have less confidence in BRICS. Brazil had major currency problems in the past. Their conversion to the Real is an amazing economics case study to break hyperinflation, but I wouldn't be sold on trusting them to the extent that I trust the US government and the dollar. Russia is...I don't even know what to say there, but their involvement in a project would make me insanely skeptical. India wiped out 86% of its cash in 2016 (https://www.bbc.com/news/world-asia-india-37974423). What happens if they say, "people aren't paying taxes again and 90% of Indian BRICSY notes are no longer valid."
Maybe this is just a currency for trade between nations and not for individuals to hold. That still requires a lot of trust between countries that have a lot of incentive to deceive each other on this front. If I'm India, deceiving China and giving them worthless paper could let me bootstrap a manufacturing industry to rival China. Chinese companies will take payment in BRICSYs for things sold internationally. I give my Indian companies BRICSYs that are "backed by gold (but secretly not)" and have them start buying heavy manufacturing equipment. China has shown that it'll export more than it imports for a good while. If/when China comes to collect their gold, I just say that the convertibility to gold has ended. At this point, I've used monopoly money to bootstrap the industries that have made China such a globally important country - plus, in 2035 or 2050, India will have way more people than China. I've successfully tipped the balance of power in Asia from China to India because China trusted that the BRICSY would actually be convertible to gold.
Yes, with fiat currency, countries (and individuals) are trusting that things will be convertible to a certain value in the future. However, that's one of the reasons for the dollar dominance. People (and countries) trust the dollar. Yes, inflation happens and the dollar isn't perfect, but the dollar has a better track record than basically any real alternative. The Euro is getting a good reputation. Sterling isn't bad. But why am I going to trust BRICS countries that something is actually convertible to gold. Even the US ended its gold standard because it wasn't really a tenable idea. I don't want to sound too down on the BRICS countries, but they often have a much shorter track record of good, stable economic governance.
If you're trusting that someone else will convert paper into gold, it feels like you end up with the same trust that you need with a fiat currency. I don't trust stable coins to be backed 1:1 with USD - there are too many sketchy actors in the space and even a reputable company is less trustworthy than the US government in this regard. Why would I trust the BRICS countries to maintain 1:1 gold convertibility? Even the US government ended its gold standard basically without notice. If you don't hold the metal yourself, is a gold standard really that different from fiat currency? Maybe it is - at least temporarily. The US peg lasted around 30 years. Would a BRICS peg last longer?
Plus, there's all the reasons why the gold standard isn't even a good plan in the first place - even if you could trust it.
Your first sentence is a bit ironic. You're conflating currency with money. Gold was never really used as currency, the currency (dollar) was backed by money (gold)
With that out of the way, let me tell you some harsh truths. Gold standard fell apart because it was a bad way to manage currency in a modern industrialized society. The Great Depression was effectively the final nail in it's coffin. Bretton Woods was essentially vehicle for US dollar dominance, and ended when in the 70s US government realized it wasn't worth the effort.
But sure, let's go back to that. Given our, and by that I mean Tech community, track record of monetary decisions that can only work out great. Let's "do our own research" again.