China’s Central Bank Official Calls For New Monetary System

It was just one day ago that we wrote the following: “The fact is that the US is currently exporting their (monetary) inflation. Lots of the newly created dollars end up at foreign central banks making abroad currencies weaker. But … the dollar is increasingly disliked and bypassed in trading agreement of the BRICS as we reported here, here, and here.”

Almost at the same moment of writing, an article appeared from Yao Yudong, one of the officials of the People’s Bank of China’s monetary policy committee, in which “he calls for a new Bretton Woods system to strengthen the management of global liquidity”. According to Zerohedge, “Yao called for more power to the IMF as international copperation and supervision are needed. [...] Contrary to prevailing misconceptions that the SDR may be the currency of the future, China just may opt to have its own hard asset backed optionality for the future.

For readers that are not too familiar with Bretton Woods, the following excerpt is a good summary. It appeared in a recent paper “Real vs False Money” written by Claudio Grass from Global Gold Switzerland.

Monetary History: monetary system of Bretton Woods (1945 – 1968)

In July of 1944, representatives of 44 nations gathered at Bretton Woods to discuss the post-war international monetary system. It was decided that the US Dollar and Gold would become the sole reserve currencies. The outcome was nothing more than America dictating the US Dollar’s official supremacy. The USD should become the only currency convertible into gold by foreign central banks. So all the world currencies were expressed in terms of and closely tied to the US Dollar. In turn, the dollar was still fixed to Gold. Only the United States could change the price of Gold meaning all other nations were forced to either increase the value or devalue in terms of Dollars. Under Bretton Woods, the US had a commitment to maintain the value of the Dollar by buying and selling unlimited quantities of Gold, at 35 USD per ounce. It also had the commitment to deliver on request, Gold to foreign central banks: Often that commitment was not met. Diplomatic pressure was applied to prevent Gold withdrawals from the US. James Dines recalls an incident when President Johnson discouraged Germany, for example, from converting its USD into Gold by reminding it that US troops stood between it and Russia. (You will find a proof for political pressure under the following link “Fed Arthur Burns on Gold” June 1975)

From that moment, it was possible for the US to pay their debt in USD; which they created out of thin air. French President Charles de Gaulle called this the “Exorbitant privilege”.

By the end of 1949 – at the high point of America’s gold power – the US treasury owned physical gold in the amount of 24.6 Billion USD at the price of 35 USD per oz. This reflected approximately 700 million ounces of gold or 70% of the total gold reserves of all central banks in the so called free world. 10 years later, in 1959 the Gold reserves had already been depleted because the amount of paper Dollars deposited with other foreign central banks exceeded the total value of the physical Gold kept within the states. If foreign central banks had demanded to exchange their paper Dollars into real money (physical Gold) the safes of Fort Knox would have only been enough to cover a fraction of the debt.

The same article on Zerohedge contends that China is close to implementing the same monetary policy of monetary stimulus like the US Fed, Bank of Japan and European Central Bank. “At that point it will be up to the PBOC to do what the Fed, the ECB, the BOE and the BOJ have been doing: remove any pretense of money creation via the commercial bank complex, and proceed to outright monetization of de novo created assets, thus flooding the system with as much money as is needed to preserve the illusion of growth. Naturally, with the Chinese stock market having proven itself to be a horrible inflation trap, the inflation explosion that would result would be epic. China will be caught between a rock (hyperinflation) and a hard place (a very hard crash landing), but the fact that neither of those outcomes has a happy ending will hardly stop the PBOC from at least preserving the alternative. That alternative will of course be to be ready and able to hit the switch when the BOJ’s printer burns out, and someone else has to step in and fill its shoes in the global “money creation” strategy, which sadly is the only one the world has left.”

Although China has never admitted officially that they are aiming to create a world reserve currency backed by a gold standard, it seems the most likely direction towards they are heading. With an explosion in gold imports since earlier this year, with an increasing number of bilateral trading agreements with their largest trading partners (excl. the US), China could be indeed be preparing for an alternative route instead of simply joining the global currency devaluation Grand Prix.


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