Why the world should move away from petrodollars and go back to the gold standard?
World War II gave the United States of America an opportunity like no other. The U.S. was the only country that emerged richer and stronger after the war. It did not have to rebuild its infrastructure, and its economy was booming. How so? Washington and its allies developed the Bretton Woods Agreement after World War II. According to this agreement, all national currencies were valued in relation to the U.S. dollar. Under this arrangement, instead of exchanging gold, the US dollar was to be exchanged and was to hold the same value as gold.
Then came the petrodollar system. Since the dollar had become the world’s reserve currency, as well as the benchmark, crude oil transactions were undertaken using dollars. The windfall which emerged for countries in the Gulf after the oil boom was simply so large that they had to take the money out of their own countries and put it in Wall Street.
Why the Petrodollar System Must be Abolished
Many countries are now whispering the question: Why should the United States’ currency be the standard around the world? Why should petrodollars be the dominant mechanism by which oil is bought and sold? Why should one currency be made so strong that any significant fluctuations in its value can turn the world economy upside down? Finally, why should the focus of all countries be towards ensuring that the stability of the U.S. dollar is maintained?
But the most important factor which should make the world depart from the petrodollar system is that an abandonment of the same will bring the Gold Standard back to life. Each currency will be pegged to the value of gold. For example, the value of one rupee will be measured against the cost of one ounce of gold, instead of the value of one US dollar.
Given how the world economy has come to be centred around the dollar, making the United States a financial hegemon, it is time for the Gold Standard to be adopted once again.
The Gold Standard
The Gold Standard is a monetary system where a country’s currency or paper money has a value directly linked to gold. With the gold standard, countries agreed to convert paper money into a fixed amount of gold.
Recently, the Russian central bank announced that it will put the ruble on a gold standard. The bank pegged 1 gram of gold to 5,000 rubles. When a currency is backed by gold rather than the US dollar, it becomes more stable and stronger. Russia’s move to embrace the Gold Standard is very significant, as it can potentially lead to many countries reviving the millennia-old system.
When an economy was doing poorly, gold left the country. When it was doing well, gold came to it. In both cases an equilibrium was eventually attained. Without any gold backing, almost every country on the planet runs a deficit.
— Atul Kumar Mishra (@TheAtulMishra) April 1, 2022
The Gold Standard has many advantages. First of all, it prevents both inflation as well as deflation. It makes the fiscal environment in a country very stable, often leading to high employment rates. Interestingly, unlike the dollar standardisation, the Gold Standard gives actual value to a currency, making it money. It runs polarly opposite to the concept of a fiat currency, in which the value of money is merely promised, and not actually accounted for. The gold standard also stabilizes prices and foreign exchange rates.
The US dollar is still the reserve currency of the world. And dollar movement upsets every single economy on the planet.
— Atul Kumar Mishra (@TheAtulMishra) April 1, 2022
Prior to the acceptance of the dollar as a “global currency”, international trade was settled using physical gold. Nations with trade surpluses accumulated gold as payment for their exports, while those with trade deficits saw their gold reserves getting depleted.
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Russia had a massive pool of $630 billion in foreign reserves. A significant portion of these reserves was in dollars. So, when the sanctions came down on Moscow, a bulk of its forex reserve was rendered worthless. That is a major problem with the internationalisation of the dollar. It gives disproportionate power to one man in the White House to control the world economy and the fate of entire countries.
The realisation is beginning to dawn on many countries. They now realise that they have vested too much power in the hands of the United States and that it is time for a change. The Gold Standard is the best way to move forward, and of course, in the long run, it can be replaced with an even better system. The primary objective of all countries, however, must be the de-dollarisation of their economies.