Special: The BRICS Gold Convertibility Problem
"All the talk about BRICS countries possible issuance of a gold-backed currency, and most of the analysis, misses a key point."
For Gold-backed money to work, 100% convertibility is needed. Paradoxically, convertibility only works when no-one actually converts.
Contents:
It’s All About Trust
QUESTION #1: What do they need to make it work?
France Converted… Just Once
Blockchain Trust
QUESTION #2: What are the risks?
Gresham’s Law in Action or What Would Joe Do?
Bottom Line
GoldSeek Article
IT’S ALL ABOUT TRUST
We just read a piece by Kelsey Williams for GoldSeek entitled: Gold Convertibility – NOT Gold Backing in which the author starts off with:
The success of any fiat currency or real money substitute (in other words, anything other than gold itself as the medium of exchange) depends on its convertibility into gold – on demand.
He is right. The GoldSeek article (also included at bottom) is a nice piece on Gold convertibility with some history thrown in that got the juices flowing for this piece. (also at bottom, a new report on Copper’s DOE upgrade)
Williams’ opening statement above spells out exactly what the BRICS need to do to succeed in their venture. When all is said and done, the BRICS Coin, if and when it comes, needs to be convertible on demand. But that is not all. It gets weirder.
Here is a greatly simplified overview in how that looks and what the hazards are:
Question: What are the BRICS chances of success using a Gold-backed currency to settle international trade differentials?
They would likely succeed (on paper) if their BRICS Coin were used to settle current account differences (assuming that is still what they propose to do) for commodity deals provided 2 things happened:
Convertible on Demand: Convertibility into Gold between nations on the platform was permitted for international settlement
Noone Actually Converts: No country actually used the Convertibility option to take delivery.
These two seemingly contradicting statements are the essence of how trust in business manifests. The first is the written law. The second is the unwritten law. The written law here is known; that being convertibility on demand.
What of this unwritten law? The UIA Encyclopedia defines that best: