This unilateral action spelt the end of the 1944-instituted Bretton Woods system, which had been set up in the wake of World War II to stabilize international finance and encourage global trade. It worked by pegging the dollar to gold as part of an international system of fixed exchange rates with all settlements in dollars. This served very well for a couple of decades. The world saw high economic and trade growth with relatively low inflation. The dollar enjoyed hegemony since all trade invoicing was in dollars.
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But there was a price to pay for that hegemony. The US ran a widening trade deficit even as gold investors got an arbitrage opportunity. Since the dollar price of gold was fixed at $35 per ounce, one could take an unlimited amount of gold out of the US by exchanging dollars for the metal at a fixed price, and make a profit.
As economic imbalances and inflation worsened across the world, with the US fiscal deficit growing (given the Vietnam War’s rising cost), this became unsustainable. The dollar was highly overvalued.
Meanwhile, central banks were profitably amassing gold by converting their dollar reserves. Gold in the US was fast depleting and the world started anticipating a devaluation, causing more frenzied gold buying. And sure enough, the system collapsed in August 1971.
Since then, the world has dealt with only fiat currencies, unstable market-determined exchange rates and continued dollar hegemony. Without gold backing, the world has seen recurrent currency crises and drastic devaluations, causing big quakes in the financial system and real economy. India’s 1991 balance-of-payments crisis too was followed by a big devaluation.
The current financial and currency instability makes some people, including backers of US President Donald Trump, pine for the older days of gold-standard stability. Steve Forbes has observed that the US had a gold standard for 180 years prior to 1971, due to which the country enjoyed price stability and high growth.
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The Heritage Foundation authored report Project 2025, which is supposed to be a blueprint for Trump’s second term, included a chapter on the idea of going back to gold. That suggestion is driven by a desire to diminish the US Federal Reserve System’s authority.
This debate may not be raging, but the idea is gaining ground. In today’s fragmented world, though, such a consensus would be nearly impossible to achieve.
Besides, the financial system is much more complex, interconnected and digitalized than in 1944. Cryptocurrencies are a reality and potential competition. Central banks are now active managers of financial systems and monetary policy. Moreover, the world simply does not have enough gold stocks to back the international stock of money. So, why is there so much talk of re-adopting the gold standard now?
For starters, take the actions of central bankers. For three years in a row, we have seen a gold-buying spree, with central banks mopping up more than 1,000 tonnes every year. In 2024, India was the second-largest buyer. It has also begun moving large quantities of physical gold back home from England.
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At a time when gold prices are at all-time highs, this enhances foreign-exchange reserves. With adequate gold held onshore, India could consider continuing with gold-backed sovereign bonds, which provided an attractive investment option and helped reduce our import bill. Dollar-buying is indicative of a desire to move away from reliance on the dollar as a reserve currency.
The freezing of Russian foreign exchange assets by the US also pointed to the risk of holding all reserves in dollars. The persistence of inflation caused by fiscal deficits and supply chain disruptions, in addition to mounting debts, all point to the fragility of fiat currencies.
Brics nations have been discussing a gold-backed settlement system or a multi-currency system to challenge the dollar’s dominance. This has elicited a sharp rebuke from Trump, who threatened punitive tariff action if Brics nations moved away from the dollar.
The current financial and currency instability makes some people, including backers of US President Donald Trump, pine for the older days of gold-standard stability.
On the other extreme is Argentina’s President Javier Milei. His radical policies have hinted of a move towards a dollar peg to help stabilize the Argentinian peso. One year after he assumed office, inflation is down, growth is up and the budget has a surplus. His success might inspire others to go for a gold or dollar peg.
As gold-buying picks up, its price will rise. Global uncertainty and geopolitics, in addition to a rush for safe haven assets and a shortage of the precious metal, will also drive gold prices up.
For the world to switch to a gold standard, the quantum of gold required to back money supply would be at least 20 times more than what’s available. Hence, it is not even a remote possibility. But a partial dollar-linked 1944-style arrangement cannot be ruled out.
Trump has a dual and somewhat contradictory objective. He wants the dollar to retain its hegemony and be the only trade-invoicing currency. But he also desires a Nixon-style devaluation, which cannot be done unilaterally in a fiat currency world. Hence, he may push for a Plaza Accord-type arrangement, under which G7 currencies could be collectively revalued.
Some of Trump’s tariff threats may be aimed at forcing the world towards a weaker but still hegemonic dollar. Will Brics respond with a hybrid gold-based currency arrangement? Only time will tell. Meanwhile, gold is a sure bet.
The author is a Pune-based economist.
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