Trump wants a great monetary reset. Where can the world hide?
As the US tries to reset the dollar-dominated monetary order, those seeking safety should consider a historical alternative to the dollar
Elmat: As people how hold gold wants it to be the alternative, capital will flow to other geographies and other assets
Published: 10:30pm, 25 Apr 2025
Chaotic as it seems, Donald Trump’s tariff war is a deadly serious attempt to address what he and his team perceive as the core issues of the dollar-dominated global monetary system.
Look no further than how United States Treasury Secretary Scott Bessent, trade official Peter Navarro and senior economic adviser Stephen Miran share a visceral anger in their public statements.
The US feels victimised because it runs large current account and trade deficits from the strengthening dollar – due in part to military spending – as trading rivals devalue their currencies, inadvertently or not weakening America’s once mighty manufacturing prowess.
Essentially, the Trump administration wants to reset the dollar-dominated monetary and trading order.
Miran’s November essay, “A User’s Guide to Restructuring the Global Trading System” – dubbed the “Mar-a-Lago accord” – envisions converting Pax Americana into Tax Americana.
Users and holders of US dollars, especially allies, would be persuaded to pay user fees essentially, by switching their holdings into long-term securities, if they wish to continue enjoying military protection. Miran’s key weapons for bargaining include tariffs and sanctions.
There is a brutal lesson here from the history of imperial finance. The Roman empire funded itself through military conquests and confiscation of enemy assets, among other ways.
The British empire adopted a more civilised model of borrowing funds from colonies and foreign investors, by offering perpetual bonds known as consols. This allowed British capitalists to borrow, reinvest or lend at higher rates. This is exactly the model adopted by Wall Street.
In 1717, Isaac Newton, as master of the mint, set a mint ratio that reduced the amount of silver in circulation, and it eventually led to the British adoption of the world’s first formal gold specie standard.
US currency initially favoured silver but this changed after the US Congress adjusted the silver-to-gold ratio in 1834, leading to gold’s emergence. With the second world war nearly bankrupting Britain, the US took control of the gold market and the dollar eclipsed the pound sterling. After the second world war, the US dollar was linked to gold at a fixed rate of US$35 per ounce.
Gold has long been accepted as a good means of payment and store of value, but its main defect as a reserve currency standard is limited supply, which constrains the ability of governments to print or borrow money. Gold creates a hard budget constraint independent of politics.
As the US’ gold reserves declined, especially amid excessive spending on the Vietnam war, president Richard Nixon took the dollar off the gold standard in 1971, and the world entered the era of floating exchange rates.
The new system gave the US the luxury of not maintaining fiscal discipline since the rest of the world wanted to hold dollars as a reserve currency.
This created an “exorbitant privilege”, and a situation that economist Robert Triffin characterised as a dilemma: the more the world demanded US dollars, the more America’s deficits grew, as well as unsustainable debt.
What is the Hong Kong Dollar Peg?
With flexible exchange rates and the free flow of capital came the post-1980s era of fiscal extravagance that encouraged excessive consumption funded by debt, financial speculation rather than productive investment, periodic financial crises and bailouts by central banks that created asset bubbles and subsequent crashes.
Proposals to reform the international monetary system have included replacing a nationally-issued reserve currency with a multilaterally-issued currency or using the International Monetary Fund’s Special Drawing Rights, which is a basket of the key reserve currencies.
Such proposals are unlikely to take off because the US would probably not want to see its currency losing its special status. Moreover, leading nations might not agree on how to cede their currency-issuing power to the IMF.
What these reformers miss is that the natural substitute for a non-national reserve currency is not another artificially designed standard but the historical candidate, gold. Gold is the only form of currency that cannot be printed by governments or mined through algorithms.
If we cannot trust politicians, national governments or central bankers to manage our money, then a transparent gold market may be able to price fiat currencies that float against each other and against gold.
The US is running increasingly larger fiscal deficits – currently 7 per cent of gross domestic product – and trade deficits – now 3.1 per cent of GDP.
It also ran up net foreign liabilities of US$26 trillion by the end of 2024. The US dollar was considered a solid safe-haven asset until recently, when the bond market wobbled even as the equity market corrected, drawing comparisons to how emerging markets behave.
The shift out of dollars is already happening; central banks have reduced the share of dollars in their foreign exchange reserves from over 72 per cent to about 58 per cent over the past two decades.
Central banks have added 1,000 tonnes of gold to their reserves for three years running, and hold more than 36,000 tonnes of gold.
The spectacular rise in gold prices to a peak of US$3,434 per ounce this week suggests a fundamental de-dollarisation not into other fiat currencies, but into gold. In other words, Trump’s financial engineers have tried to use a single weapon – tariffs – to reset the system and inadvertently pushed the system back towards a gold standard. Central banks cannot fight higher gold prices by selling precious reserves or setting higher interest rates, the last thing heavily indebted governments need.
Between American financial engineers and gold, it’s in gold I trust. |
