Last Monday there was a meeting in Washington hosted by the Official
Monetary and Financial Institutions Forum (OMFIF) to discuss the future
relationship, if any, of gold with the Special Drawing Rights1
(SDR).
Also on the agenda was the inclusion of the Chinese renminbi, which seems
certain to be included in the SDR basket in this year's revision, assuming
that the United States doesn't try to block it.
This is not the first time the subject has come up. OMFIF's chairman, Lord
Desai wrote a paper about it after the
last Washington meeting on gold and the SDR exactly four years ago. The
inclusion of the renminbi in the SDR was rejected in 2010 because of
inadequate liquidity and is due to be reconsidered this year.
Desai pointed out in his paper that there are difficulties when it comes
to including gold, because (and I think this is what he was trying to say)
none of the SDR's paper constituents are convertible into gold, but gold's
inclusion in the SDR would make them convertible through the back door.
However, Desai seemed keen to re-examine the case for gold.
It should be pointed out that if gold is included in SDRs the arrangement
cannot be long-lasting so long as the major central banks insist on printing
money as an economic cure-all. However, China's position with respect to gold
and her own currency could be a different matter.
The Chinese government has almost certainly accumulated large amounts of
gold yet to be included in her reserves, and she has also encouraged her own
citizens to own gold as well. We can therefore be certain that China sees a
monetary role for gold while at the same time she is pushing for the renminbi
to be included in the SDR basket. There is no doubt, if you read the IMF
papers from the last SDR review in 2010 that the renminbi does now fulfil the
criteria for inclusion today. So the question then is will the advanced
nations, which dominate the IMF's membership, permit the renminbi's
inclusion, and will the US, which has dragged its heels on giving China and
the other BRICS nations a greater shareholding in the IMF, relent and permit
these reforms, which were accepted by the other members back in 2010?
The Americans' blocking of reform signals her desire to preserve the
dollar's hegemony; but given she lost out spectacularly over the creation of
the Asian Infrastructure Investment Bank, IMF reform could become the next
serious threat to the dollar's dominance. And if America does not back down
over the IMF and the SDR, she will have no fall-back position; China on the
other hand still has some aces up her sleeve.
One of them is gold, and another is her role in a rival organisation
established by the BRICS. The New Development Bank (NDB) is in the final
stages of being set up, driven by frustration at America's attempts to
protect the dollar's role and to keep the IMF as an exclusive club for
advanced nations. Instead, the NDB could easily issue its own version of the
SDR with the gold lining Desai referred to in his original paper.
The reason this would work is very simple. The BRICS members, unencumbered
by the cost burden of modern welfare states could exercise the monetary
restraint required to tie their currencies to gold, perhaps running a
Bretton-Woods-style2 gold-exchange
arrangement between member central banks to stabilise their currencies.
However, the NDB would almost certainly want to see the gold price
considerably higher if it is to play any part in a new rival to the SDR.
Other BRICS members would be encouraged to make sure they have sufficient
gold on board by selling US dollar reserves to buy gold, ahead of any
decision to go ahead with a new super-currency.
It would appear the era of the dollar's global domination as a reserve
currency is coming to an end, and the stage is now being set for gold to be
officially accepted as the ultimate reserve money once again, this time by
the next generation of advanced nations.
1 The SDR is an international reserve asset, created by the
IMF in 1969 to supplement its member countries' official reserves. Its value
is based on a basket of four key international currencies, and SDRs can be
exchanged for freely usable currencies. As of March 17, 2015, 204 billion
SDRs were created and allocated to members (equivalent to about $280
billion).
2 A now defunct system of monetary management that established
the rules for commercial and financial relations among the world's major
industrial states. In 1971, the United States unilaterally terminated
convertibility of the US dollar to gold, effectively bringing the Bretton
Woods system to an end and rendering the dollar a fiat currency; many fixed
currencies (such as the pound sterling, for example), also became
free-floating at the same time.
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