Back to the gold standard

Before the dollar was annealed as the international reference currency, there was a different monetary system, the so-called gold standard, which basically consisted of a system that fixed the value of the monetary unit from gold.

What was the gold standard?

The issuer of the currency it could guarantee that the notes it issued were backed by a certain amount of the precious metal, whose value was already fixed according to an exchange rate established and agreed by the financial institutions of the time.

For example, in 1944, when the adoption of the dollar as a global currencyIn the framework of the creation of the Brettón Woods agreements, at that time the US currency had an exchange rate in relation to gold, which was at the rate of 35 dollars for an ounce of gold.

In this way, it was guaranteed that for every 35 dollars that the North American government issued, the value of that paper money was backed by one ounce of gold, which meant that by owning 35 dollars, you were not only acquiring paper money as such, but the central bank of the United States guaranteed you that at the same time you were owner of an ounce of gold.

What happened to the pattern?

That system collapsed in 1971 and the great difference that exists in current times with the time in which the gold standard predominated, is that simply and simply, the dollar no longer has a metal that supports its value, so in this case, being the holder of a US dollar, now you are only owner of paper money as such, and the guarantee that the North American government gives you of its value, that is, that it is simply sustained from the trust given by its holders, who would be represented by multiple markets and investors around the world, that make millions of transactions daily, such as purchases and payments using the US currency as the international reference currency, and that is present in all their imports and exports, as well as investments with various countries around the planet.

What are the latent dangers behind the dollar as an international currency?

When the value of the dollar was based on the gold standard, there was no general concern like the one that prevails today. The reason is very simple, because at that time the US government could issue as many dollars as its gold reserves could support, so there was a physical asset that justified the issuance of the currency.

However, everything changed in 1971, when, due to the costly Vietam War, the government of Richard Nixon made the decision to leave behind the convertibility of the dollar with gold, since its reserves of the metal were not enough to support the enormous amount of banknotes it had to issue to meet the multiple expenses caused by the war.

This is how the system that we know today was born, however this is not perfect and several renowned economists have their reluctance regarding the solidity represented by the dollar, not just for the US economy but for the entire international financial system as a whole.

The reasons for concern center on the fact that the North American central bank, the Fed (Federal Reserve System), in Spanish the Federal Reserve System, Today you can issue as many dollars as you want, that is, technically there is no cap on the amount of indebtedness that the United States can have with the world, as well as at the domestic level.

This situation is certainly worrying, since it is thought that the dollar may spell the advent of a new financial bubble, whose outbreak would cause the worst economic crisis in history.

The reason behind these gloomy predictions centers on the increasing increases to the US government debt ceiling. In addition to this, it is thought that the confidence that the United States represents, at any moment could collapse in the face of a possible crisis in the country, since the dollars are supported only by the confidence in the economic power of the United States, any economic crisis of the nation is always a point of important concern, since it will not always be able to provide certainty to countries and investors, about a paper money that does not have any physical good behind that can back it up.

The new proposals that try to emulate a monetary system like the gold standard

Faced with the new challenges that lie ahead as a result of the hegemonic decline of the United States, the international economic system is in a process of transformation in which every time there is a greater participation of other nations to try to establish a new financial reference system.

Precisely, in recent years, one of the most prominent actors regarding these initiatives is China, a country that for some time has become a serious contender for the leadership of the international economy, and in order to achieve this end, it is carrying out a series of actions aimed at diminishing the power and influence of the dollar in world economic transactions.

In this way, recently, the Chinese government launched on March 26, yuan-denominated oil futures contracts, in order for this initiative to serve as the beginning of the end for the hegemony of the dollar. The motivations behind this new Beijing implementation can be understood from various angles.

First of all, what is already taken as fact is that China wants to gain greater visibility in the decision-making of the international community, Therefore, being the driver of a new monetary system is an excellent resource to gain prestige and recognition around the world, a trust that is currently mainly placed in the United States.

Likewise, secondly, it should be mentioned that the political and diplomatic relations that the Donald Trump government maintains with the rest of the world are far from being peaceful, being China one of its great focus of attack on economic and commercial losses that your country has had with other countries.

Therefore, it is natural that the government of China wants to accelerate as soon as possible its initiative to disengage from the monetary control systems that Washington has, and the solution to this dilemma has been found in the weakening of the dollar from a new reference currency. It is under this context that the creation of the petroyuan occurs.

Can the petroyuan succeed?

The international environment under which the creation of the petroyuan takes place is an optimal scenario to promote initiatives against the attacks and hostilities that the Donald Trump government has launched against many countries around the world, an action that has made it extremely unpopular and at the same time It has taken away important allies that previously were a great foothold for US hegemony. However, it is because of these circumstances that the petroyuan has found an environment conducive to reaching the markets, at least as far as the political opportunity of the moment is concerned.

However, on the other hand, in the financial field, it has become clear in recent days that the dominance of the dollar is so ingrained in today's world that it will not be an easy task for the currency that is backed by Chinese oil. prevail in world markets, which are heavily weighted around the dollar confidence.

Even so this first attempt to unseat the US currency in the world oil payments represents a first step in reducing the power of this currency, and that is why it is so relevant for the establishment of a new economic order, for all that it represents and implies at the same time.

Will the dollar ever return to the gold standard?

At some point during the Trump presidency, the possibility that the US financial system will regain the gold standard as backing for its currency. However, this proposal has not achieved greater repercussion due to how complicated it would be for an economy that currently manages a public debt of more than 14 trillion dollars, to support all that amount of dollars in gold, which according to statements by some economists, in agreement to the amount of this metal that the federal reserve has, it could be technically possible, since they mention that for the gold standard to be considered as valid in the United States central bank, it is only necessary that they be able to support the 10% of all dollars in circulation, which, according to these analysts, is within the current possibilities of the Fed.

As the international economy is today, it is reasonable to think that it requires several structural changes, but the important thing here is that it is always taken into account that said transformations must always aim at the well-being of the majority of the world's population and not just a few.