Last week various news agencues reported that Iran plans to sell its oil to India for gold instead of dollars. The switch from American currency to the precious metal is the latest example of Tehran’s backlash against Western pressure and sanctions. But a deeper look shows there are better reasons for foreign countries to use gold over dollars, and if those managed to be demonstrated by Iran it may not be long before others follow suit.
Since the advent of the Bretton-Woods monetary order, dollars have been the international money of choice: the dominant reserve currency and the most commonly-accepted medium of payment for globally-traded goods and services. But reserve currencies, as the great international economist Robert Mundell pointed out, tend to weaken in the long run as their supply outstrips demand. Governments with reserve currencies end up over-borrowing, leading to this outcome.
Gold is uniquely suited for international banking and commerce in place of reserve currencies because it cannot be manipulated by national governments. Gold cannot be debased or destroyed and it is no one country’s liability. Countries which receive gold in exchange for their goods or services are not left holding another nation’s debt but instead a real asset. In a world of money-printing central banks, this holds particular appeal.
Which brings us back to Iran and India. The European Union recently imposed sanctions which will freeze Iran’s central bank assets and completely block oil sales by midsummer (similar to current U.S. policy). Taking gold for payment will sidestep those financial restrictions. If China follows India in agreeing to this arrangement (which it is reportedly considering) then a steady stream of monetary gold would flow into Iran and likely right back out of it for other goods and services. When that happens, countries with brighter growth prospects and more legitimate governments than Iran will notice the empirical benefits of using gold as an international currency.