It was year 1573 when Spanish Empire started large scale minting of silver pesos from a Sierra de la Plata (mountain of silver) discovered in their prized possession of South American land. In the year 1581 the Ming Dynasty of China started asking silver for its exports of tea, silk and much sought after Chinese porcelain.
The challenge to the West was similar at the time that the Chinese were so self-sufficient that nothing could be exported to China to match with imports, so massive amounts of the Spanish Silver Peso also knows as ‘real de a ocho’, were needed to settle trade with China, eventually transforming the Spanish Silver Peso into a global trade currency.
British efforts in 1792 to convince Chinese Ming rulers to accept the barter of goods and not insist on silver in return for their exports went in vain and finally the 1842 Opium War could only convince the Chinese otherwise.
The gold-backed British Pound thereafter replaced the silver Spanish Peso and dominated world trade till the year 1944 when the Bretten Woods System was finalized on warships during World War II. This effectively led to the adoption of the gold-backed US Dollar as the world’s reserve currency, which was further cemented by the Saudi Petro Dollar deal of 1974 after the US Dollar was made a fiat currency in the wake of the ‘Nixon Shock”, which removed the gold peg to the US Dollar on August 15, 1971. This arrangement appears to have come to an end in June 2024 after 50 years.
I believe that the world is again standing at a crossroads similar to 1581. Many countries are struggling to export to China, but self-sufficient China floods the world with goods and services. Beijing once again holds the key to world trade and is in a position to decide which world trade settlement will dominate the world now.
An alternative world trade settlement system seems to be on the horizon. BRICS might come up with its own currency and settlement system which is speculated to be backed by gold. The sudden 40% jump in gold prices in the last two years and 20% since Feb 2024 itself indicates that somewhere someone is piling up a mountain of gold to steer the new world financial order and a reset appears imminent.
The business world must watch this development closely and take measures to survive the potential turmoil which the transition might cause. The almost zero interest rate that became fashionable after the 2008 financial crisis and the greedy expectation of negative interest rates are things of the past and I believe that rising interest rates won’t come down but rather will increase further for the foreseeable future.
The world will be looking at China and India as they are becoming the new centers of innovation and surplus production. These two countries with almost 40% of world’s population are the new powerhouse of the world economy and they stand together at BRICS notwithstanding their political differences. Let us hold our collective breath and witness when the world transits from one financial order to another.
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