The BRICS will soon have different currencies

There has been a push for a long time to diversify the world's currency reserves. It got worse after 2008, but since 2022, it has gotten worse. It will be a big part of the next BRICS Summit, which is expected to make the trend even more robust.

In 2016, U.S. Treasury Secretary Jack Lew warned that "the more we make using the dollar and our financial system depend on following U.S. foreign policy, the more likely it is that in the medium term, people will switch to other currencies and other financial systems."

Lew warned the Trump and Biden administrations, but neither listened. As a result, the Global South has become more interested in the BRICS, whose next, much-anticipated meeting will be held in South Africa at the end of August.

At Johannesburg, one of the most important things to discuss will be the BRICS's efforts to create payment methods other than the U.S. dollar.

Risks of the dollar's dominance

When the U.S. banking crisis was going on in May, economist Paul Krugman said that the "de-dollarisation" uproar was caused by crypto-cultists and Putin supporters as if the trend was just a bunch of anti-patriotic nonsense.

But, as Krugman pointed out, much of the world's trade is still billed and paid for in U.S. dollars. Many banks based outside of the U.S. offer dollar-denominated deposits. Many companies that are not found in the U.S. borrow in dollars. Central banks keep a lot of their reserves in dollar assets. People thought that, like a jewel, the U.S. dollar would always be around. Every primary reserve currency has been around forever.

Krugman should have realised that the current coercive monopoly of the U.S. dollar worries the Global South and a growing number of major economies in the West. This is because the world depends too much on the U.S. dollar for trade invoicing and settlement, non-US corporate and financial giants rely on the dollar, and the dollar has a high share in central banks' reserves.

When the U.S. uses the dollar as a tool in its foreign policy in the name of the international community but without the wide backing of the international community as a whole, it puts at risk trade invoicing and settlement, foreign corporations, financial institutions, and central bank reserves.

True, U.S. Treasury Secretary Janet Yellen said not long ago that the dollar-based system of money is still the only option. But not too long ago, she also said that terrible things would happen if Washington couldn't agree on a (yet another) new debt ceiling. In the same way, the British talked about how great their sterling pound was until 1914. But the U.K. lost its position as the world's leader when its economy got too big after 1945.

There will be some unique things about the early 21st century, but it won't be all that different.

Diversification has its benefits.

How do the BRICS help to make the world more diverse? Because of the way it is set up, the group can take unilateral, bilateral, and multilateral actions. Analytically, these range from small, steady changes to more significant, more unilateral steps. These, in turn, are driven by the original BRICS economies (Brazil, Russia, India, and China), the new members who want to join, and the alliance partners who agree with the group's goals and are thinking about joining as well.

Anil Sooklal, South Africa's ambassador-at-large for ties with Asia and the BRICS, said that about 22 countries have officially asked to join the group, and about the same number have "informally asked about becoming BRICS members." Argentina, Iran, Saudi Arabia, and the United Arab Emirates are reportedly among the countries that want to join the group.

The growing number of significant and populous emerging economies makes it possible for "network effects" and "positive spillovers" that will be necessary to start up the new critical infrastructure for the proposed alternative global financial system.

But what the BRICS give is more than just getting rid of the dollar. Critics and political opponents of the BRICS, especially in the West, often say that the goal is to eliminate the dollar. This is not true. Before the war in Ukraine, the Atlantic Council called Russia and China "partners in de-dollarisation." That, in turn, was seen as "an alternative to the US-controlled SWIFT," the most popular payment method. In the West, the fact that Russia and China work together is seen as a de jure partnership, and de-dollarisation is seen as a way to get around using dollars.

The truth is a little less shocking and a lot more complicated. The BRICS have little to do with rogue states that try to change the world order in secret. Rather than just getting rid of dollars, the BRICS want to diversify and rebalance their economies. This is similar to how asset managers try to keep their investments well-balanced.

From Keynes's Bancor to the BRICS's move to have different currencies,

Sceptics say that the dollar has already been buried a lot of times. Why does it have to die now? But who says that it must die? More people means more fun. Most BRICS countries still depend on the U.S. dollar, but those punished by the U.S. and/or its allies have gotten rid of many of their dollars and often bought gold instead.

What the big BRIC economies want is a more diverse system of currencies around the world. We can't keep going the way we are. If it isn't fixed slowly over time, it will change significantly during a major world disaster. The goal of BRICS is not to get rid of the dollar. Instead, it is to make the money system more diverse to reflect the world economy better today.

In terms of history, it's a familiar idea. In 1944, John Maynard Keynes made a similar case for the suggested supra-national currency bancor in Bretton Woods. The name comes from the French word banque, which means "bank gold." But the U.S. officials killed the idea because they wanted the dollar to replace the U.K. pound as the world's primary reserve currency. On the other hand, Keynes warned that the dollar's dominance would lead to a lot of uncertainty and volatility after Western Europe and other big economies rebuilt and got back on their feet.

That happened when President Nixon stopped letting the dollar be changed into gold in 1971. Even though it was meant to be a short fix, it made the U.S. dollar fiat money that floats constantly. Since gold was no longer a way to measure value, the idea of value took its place. The price shock that followed was felt all over the world. With the twin oil crises, oil prices quadrupled, followed by out-of-control inflation and stagflation, record-high U.S. interest rates and substantial rearmament drives.

The rise of organisations that work together

In geopolitics, the U.S. has continued to rely on big Western economies and Japan, but in international economics, it has refused to give up the exorbitant privilege. As a result, the dollar monopoly led to asset booms in the 1980s, early 1990s, early 2000s, and finally in 2008. During the Great Recession, China's central bank governor Zhou Xiaochuan brought up the idea again and pushed major Western economies to "reform the international monetary system."

Big promises were made in Brussels, Washington, and Tokyo, but not much came of them. So, there are attempts to create complementary development institutions and critical infrastructure, such as the BRICS New Development Bank (NBD), the Asian Infrastructure Investment Bank (AIIB), the Bridge and Road Initiative (BRICS), and the search for new currency arrangements.

The BRICS want to keep the order of the world the same. Instead, they try to encourage one thing over another. Still, global currency arrangements can be about more than just what's best for Americans, who comprise only 4.1% of the world's population. It must also consider the goals of a multipolar world economy, in which the big emerging economies drive the growth prospects for the whole world.