US Monetary Coercion Could Backfire, Resulting In A Global Gold Standard

By Patrick A. Heller
Commentary on Precious Metals Prepared for CoinWeek.com

On March 17, through pressure from the US government and some European nations, Iran was cut off from access to the Society for Worldwide Interbank Financial Telecommunications (SWIFT) system. Belgium-based SWIFT handles almost all international banking transactions. Cutting off Iran from SWIFT was an unprecedented action which could be considered as a provocation for war by Iran.

Several Asian nations buy oil from Iran. In order to work around the inability to use SWIFT, India is considering paying for Iranian oil with gold or currencies other than the US dollar. In response, the US government has threatened to cut off India from the SWIFT system.

China is Iran’s largest trading partner. Now China is considering whether to use gold or other paper currencies to pay for Iranian oil. China is also a significant trading partner with American companies, which helps hold down consumer prices in this country. If the US government threatens to cut off China from the SWIFT system when it pays for Iranian oil with gold or other currencies, American citizens could end up as the ultimate losers.

China has enough gold to use some of it to pay for Iranian oil. If such payments lead to China being cut off from the SWIFT system, that would be a signal that gold is a more reliable form of payment for international transactions than any currency that depends on the SWIFT system. In my judgment, there is a strong chance that the consequence of such a development would be that China would create a successful gold-based competitor to the SWIFT system.

In other words, if the US tries to strong-arm other nations with the threat of punishing them financially by eliminating their ability to use the SWIFT system, this step could backfire. A new international trading system could come into existence that does not use the US dollar at all. Further, the competing system is likely to result in the explicit use of gold as a global monetary system.

Physical gold is an asset in its own right. It is not a liability dependent on the credit worthiness of another party for its value. That makes gold an ideal monetary unit that would be exempt from any attempt by the US government to bully other nations.

Gold is already an unofficial form of money, as governments around the world pay close attention to the exchange rate between gold and their currencies. Even Federal Reserve Chair Ben Bernanke conceded that he closely monitors the US dollar price of gold. If, or maybe I should say when, gold again becomes an explicit monetary unit, that will spark a huge decline in the demand for US dollars for international trade. As this occurs, the value of the dollar will sink, resulting in far higher consumer prices for Americans.

I realize that the politicians and bureaucrats in Washington are not inclined to take my advice. But if they did, I would warn them against threatening China with being cut off from the SWIFT system. Americans would not appreciate the pain they would likely suffer as a consequence of such a step.

Patrick A. Heller owns Liberty Coin Service and Premier Coins & Collectibles in Lansing, Michigan and writes Liberty’s Outlook, a monthly newsletter on rare coins and precious metals subjects. Past newsletter issues can be viewed at http://www.libertycoinservice.com. Other commentaries are available at Numismaster (http://www.numismaster.com under “News & Articles). His award-winning radio show “Things You ‘Know’ That Just Aren’t So, And Important News You Need To Know” can be heard at 8:45 AM Wednesday and Friday mornings on 1320-AM WILS in Lansing (which streams live and becomes part of the audio and text archives posted at http://www.1320wils.com.