BRICS Will Break the Dollar and Usher a Return To Gold – Mises Institute

(Kitco News) - The U.S.-led West will soon witness the end of the dollar’s preeminent position in international trade, and all of fiat will follow, writes Patrick Barron on behalf of The Mises Institute, which endorses the Austrian school of economics in the tradition of Ludwig von Mises.

Barron says the recent BRICS summit in Johannesburg, South Africa, included “an agreement on a first step toward establishing an alternative international trade settlement system based on commodities, which would certainly include gold.”

“Although the coming change may be characterized as one between the Western democracies and the BRICS nations, the real battle is one of ideas—between Keynesian economic theory and gold,” he writes. “The winner will be gold.”

Barron argues that even with the end of Bretton Woods in 1971, gold has never actually been proven inferior to fiat. “The gold standard was not replaced by a better monetary system,” he says. “It was suppressed in stages to satisfy the state’s insatiable need for money—first to make war and then to corrupt the people via welfare. The result, of course, has been never-ending wars, a creeping expansion of the welfare state, unsustainable public deficits, and the accelerating debasement of the currency.”

He points out that the debasement of the fiat dollar “has lowered its purchasing power to gold by 98 percent since 1971,” and says that the sanctions against Russia following the invasion of Ukraine, including the freezing of Russian-owned assets and their banning from the dollar-based SWIFT interbank settlement system, has accelerated the shift toward an alternative system.

“Introducing gold into the trading system will expose the main fallacy of Keynesian economics: the elevation of aggregate demand to prominence in a nation’s economy rather than production—the only means of satisfying the demand in the first place,” Barron writes. “Keynes elevated the concept of ‘aggregate demand’ over production, while Jean-Baptiste Say shows that production is required in order to enjoy the benefits of consumption.”

He writes that “this rather upside-down theory appealed to politicians” because “it gave them carte blanche to spend, all with money created out of thin air by the central bank.”

Barron says that "the new settlement system for international trade will require settlement in gold,” and that the advantages of this new system “will become obvious to every nation, not just the current BRICS members.”

“The political benefit is that no one nation can control or manipulate the system for its unearned benefit,” he writes. “The economic benefit is that government spending will be minimized so that resources can be allocated to production rather than state aggrandizement. A member can expand imports only by expanding exports. This puts market pressure on member governments to reform their internal economies in order to increase production.”

Barron says that increasing demand artificially “would be counterproductive because gold would drain from the nation’s gold settlement account,” which would result in the suspension of imports, so the gold-based system “encourages sound economic practices within its members’ individual economies.”

He argues that the social democracies of the developed world, and the U.S. in particular, will find themselves at a disadvantage in a gold-based monetary and trade system. “Nations like the United States, who have huge welfare obligations and who have politically connected industries that do not add to the nation’s capital base, will struggle,” he says. “Having lots of nuclear weapons will be irrelevant, and having bases around the world will be liabilities rather than assets.”

“[O]ver time, the gold settlement system for international trade will expand into the members’ internal monetary systems,” Barron concludes. “In other words, fiat currencies—which can be inflated or debased by governments—will be thrown on the ash heap of history. Instead of Keynes’s predictions in 1924 of the gold standard, the fiat currencies will instead become the ‘barbarous relics’ themselves.”

The BRICS leaders announced on Aug. 24 that their finance ministers would be tasked with exploring the issues of local currencies, payment instruments and platforms, and will report back next year.

“It’s not an alternative to SWIFT,” South African finance minister Enoch Godongwana said of the potential BRICS payment platform. “It is a payment system which facilitates a deepening of the use of local currencies.”

But with Russia assuming the BRICS chairmanship on Jan. 1, the finance minister’s mandate would seem to set Putin up for a major de-dollarization announcement when Russia hosts the next BRICS summit in October of next year, or perhaps even a new gold-backed trade currency for the bloc.

And any developments on this front, whether it takes the form of a payment platform to intermediate between local currencies, or the new trade currency itself, would be even more significant at next year’s summit, as the bloc has more than doubled its membership and has added major oil exporters Saudi Arabia, UAE, and Iran, threatening the greenback’s ‘petrodollar’ status which many consider the lynchpin of U.S. control over the global monetary system.