by RICHARD J GRANT
JOHANNESBURG, (CAJ News) – IT is not obvious that the creation of a Brazil, Russia, India, China and South Africa (BRICS) currency was anyone’s first choice.
Certainly, each of the member countries has an interest in maintaining and spreading the reach of its own national currency. Each currency serves as a domestic unit of account, medium of exchange, policy instrument, and potential source of government revenue called “seigniorage.” A well-managed currency can also be a marker of national independence and pride.
Those who use a currency do so to facilitate trade; that is, to reduce the cost of trade. The better a currency is perceived to do this, the more widely used it will be. And the more widely used it is, the better it is at facilitating more trade. This explains the ubiquitous use of the U.S. dollar in international trade and, within some countries, as a de facto local currency and store of wealth. All the BRICS nations have benefited from the worldwide trading relationships facilitated through acceptance of the dollar as the common international currency. They have also benefited from access to American banking and payment systems – and to American financial markets.
So why a BRICS currency? Acceptance of a currency in trade today depends on confidence that others will accept it in trade tomorrow, and that the currency will be stable in value. Its usefulness in trade also depends on trust in the prudential management of associated financial institutions and impartial access to payment systems. In a world of fiat money and extensive financial regulation, this implies trust in a government.
This is also why none of the BRICS+ currencies are currently favored to displace the dollar. None has sustained the cultural development, and the relationship between government and governed, that builds confidence in the rule of law – and is a prerequisite for the emergence of deep financial markets. This takes a long time to develop but can be destroyed rather quickly.
That is the danger to the U.S. dollar today. Since early 2021, Americans have suffered a burst of inflation rising as high as 9 percent before declining to just over 3 percent. Although the dollar inflation rate is likely to fall further, the federal deficit has soared on the back of huge increases in unproductive spending. Blatantly political prosecutions – in which the innocent are convicted and the guilty set free – have become a daily spectacle in the United States while everyone watches to see how the electorate will respond to these incessant insults. But none of these problems is unique to the United States.
American-led sanctions against trade with Russia have blocked access to dollar-based banking and payment systems. The freezing and likely confiscation of $300 billion of sovereign Russian assets is a lesson to all countries – especially China – that future policy disputes could put their assets and trade facilities at risk. It is prudent to take precautions against such risk.
Many countries have shifted significant portions of their dollar reserves into gold and taken delivery of that gold. The dollar price of gold has risen more than 15 percent in the past year, though it has steadied over the past two months. Gold is the definitive reserve currency, and it is rumored that that the BRICS currency – “the Unit” – will be a gold-based unit of account, possibly combined with a basket of BRICS national currencies. In the past year, four of the five individual BRICS currencies have tended to stabilize relative to the U.S. dollar. Brazil has announced an inflation target of 3 percent, a target that might sound familiar to South Africans. This hints at a policy of currency convergence.
In 2001, I proposed that the South African rand be fixed to the value of a basket consisting of 20 percent gold and 40 percent each of the U.S. dollar and the euro. The rand would have continued in circulation as normal but would have reflected the valuations of the three component reserve currencies. Inflation would have been reduced to negligible levels and interest rates would have reflected the reduced currency risk. But if the main purpose of the BRICS currency is to reduce dependence on the dollar and euro payment systems, then gold should play a greater role in the creation of a BRICS unit of account. It is the only non-fiat reserve currency.
As a unit of account, the BRICS currency would not need to circulate as a medium of exchange. It would simply facilitate pricing and contracts. Settlement of contracts could be achieved through book entries in BRICS Unit accounts or through direct exchange of the indexed values of national currencies.
The foreign exchange market would continue with high volumes of daily trades to ensure price discovery for all tradable currencies. Gold would continue to be priced in dollars. But a new emerging pattern of international trade cooperation will promote direct settlement in national currencies and the development of non-dollar payment systems.
NB: Dr Richard J Grant is Professor of Finance & Economics at Cumberland University, Tennessee & Free Market Foundation Senior Consultant.
– CAJ News