The Biggest Monetary Event of the 21st Century?
Up until World War I there was no world or global monetary system as nations used gold and silver as money and national currencies or bank notes were just receipts for specie or coins. There were some rules nations followed but it was not as official and institutionalised. The nations of the world had not set up institutions like the UN, IMF or World Bank which seem to be necessary in the modern day. Whichever way you look at it the two World Wars changed the way nations and people looked at money and that is what we will look at today and whether a summit of the BRICS that will be taking place a few days from when I am writing this will change the way we look at money.
Before we look at what the BRICS is we have to go back to 1944 and the Bretton Woods summit that took place at the Mount Washington Hotel in Bretton Woods, New Hampshire, U.S.A. By 1944 the Allies under the leadership of the U.S. and the U.K. convened at their summit to set up a new monetary system for the post-war era. The IMF and the World Bank would subsequently become a part of this system with the founding of the UN a year later. The agreement at Bretton Woods made the American dollar the dominant currency as the U.S. held about two thirds of all the official gold reserves. Americans had become an economic behemoth as it was left unscathed by the two world wars and its economy was the biggest and most industrialised. The other currencies like the pound sterling, the French franc, the Dutch guilder, the Italian lira and so on would now have their exchange rates fixed to the dollar and the dollar would be fixed to gold at $35 per troy ounce.
So even though the US and Western Europe had left the gold standard domestically international trade settlement between nations would be done in dollars and gold. So if the UK had a dollar surplus it could go to the US Treasury and exchange it for gold or keep the dollars as they were as the saying went ‘as good as gold”. By 1971 the US broke the Bretton Woods agreement as it started to basically create too many dollars without the gold backing which is another word for inflating the currency. America was basically printing money, buying things from other countries while other countries had to earn dollars if they wanted to buy US goods. The international markets realised this and countries like France and the UK demanded gold for surplus dollars but President Nixon defaulted or closed the gold window on August 15, 1971.
For 52 years the world’s monetary system has been run as a fiat currency system where the money has no backing but the American were able to keep dollar hegemony going as they did a deal with the Saudis in the mid-1970s in which the biggest oil exporter in the world would be protected military by the US and would only sell their oil in dollars. What this deal did was make sure that other nations would need dollars to buy oil and so demand for the dollar would remain relatively strong for decades. This was called the Petrodollar. This made sure that despite having no backing by real money or gold the dollar has remained the major reserve currency for the world. The problem is that what we have had is a non-monetary system since the Bretton Woods agreement was torn up by President Nixon. America has been able to inflate the currency supply almost ad infinitum, its trade balance has been in deficit for decades and its national debt has gone from just under $400 billion in 1971 to almost $33 trillion as of now.
Some world leaders like Sadam Hussein and Moamar Qadaffi tried to challenge the Petrodollar as they could see that it gave America the exorbitant privilege to print currency out of thin air to buy valuable commodities from the poorer emerging market countries. In this system countries had to use the dollar to buy not only oil but virtually everything else from other nations. We saw what happened to Saddam Hussein and Qadaffi. The US with its allies have made sure until now that dollar hegemony will not be challenged.
So where do the BRICS come into the story? BRICS is an acronym for Brazil, Russia, India, China and South Africa. It was coined by a Goldman Sachs banker in 2001 and by 2010 these countries created a formal group called BRICS and it would be an alternative to the G-7 and the Western countries that have been under the Bretton Woods system and then the petrodollar system. With the growth of not just the BRICS but other emerging markets or Global South countries their economic, political and even military clout has been growing and especially after the 2008 Global Financial Crisis which was really a Western financial crisis. The BRICS now represent 26.6% of world GDP, 41.5% of global population and 26.7% of the world’s land surface and that is not adding dozens of other countries like Saudi Arabia that want to join BRICS.
The other reason there is great interest from other nations in joining BRICS is that the US and its allies have been using the dollar and the global trade and payment system to punish nations that don’t agree or play ball with the US. So under the leadership mainly of China and Russia the BRICS have been building an alternative monetary infrastructure to the petrodollar for almost a decade and that is why the 2023 BRICS Summit to be held in Johannesburg, South Africa from August 22 -25 is so important. There is a great deal of speculation whether a new monetary or trade settlement system outside the dollar will be announced. By the time you read this this summit will have been history, but you might not be told how important it is not just for the Global South but for us in the West by the BBC or other news media. Whatever happens in Johannesburg we in the UK and the West will continue to see a relative economic decline as the BRICS and others stop using the dollar and the US’s allies currencies for trade. We are already seeing the effects of this through higher prices and a weaker pound. We will have to tighten our belts and start working harder to compete with the BRICS & Co.