On March 23rd it was announced that buyers from “unfriendly countries” would provide rubles in return for Russian gas, instead of the traditional U.S. dollar. Eventually the announcement was extended to oil and other commodities. Will the stringency of such a decree hold? The bet here is that it won’t. Credible money is what matters to producers of goods and services, period. At the same time, Russia’s move to a gold-defined ruble in concert with its decree was logical, and by extension, predictable.
That Russia wants rubles in return for its commodities is in a sense immaterial. It is because when you stop and think of it, no one accepts dollars, euros, pounds, yen, yuan, or rubles for goods and services; rather they accept what those currencies can be exchanged for. Which makes Russia’s announcement somewhat of a statement of the obvious, but also something for readers to follow closely as a way of better understanding money.
Russia’s gold link is a statement of the obvious given the basic truth that goods and services for goods and services underlie all transactions that are on the face of it refereed by “money.” I’ll take your dollars for my computer is the computer seller’s way of saying I’ll take goods and services of equal market value to my computer. While the dollar has been far from perfect in modern times, it’s generally trusted by producers the world over. Producers of goods and services will accept dollars for their production because they feel they’ll have a reasonable chance of going into the market with dollars received and attaining goods of equal value.
With Russia, it wouldn’t just start demanding rubles for commodities. To do so would be economically suicidal given the decline of the ruble that we’ve witnessed since the country’s Ukraine invasion, but also at other times since economic liberalization began in the 1990s. Again, no one accepts “money” for goods and services. They always and everywhere accept roughly equal value for what they’re bringing to the market.
In that sense, the Russians wouldn’t demand rubles in return for commodity exports unless they were reasonably certain that the rubles would have exchangeability in the marketplace. Russia’s link of the ruble to gold is the country’s way of avoiding exporting more in return for the import of less. In short, Russia’s announced gold/ruble link is an acknowledgement of what money is, and always has been: a facilitator of the exchange of actual goods and services for goods for goods and services of equal value.
Poorly defined, frequently debased money is rarely used in transactions precisely because it creates winners and losers in trade, when trade by its very name is mutual enhancement. In other words, Russia has long had a currency that didn’t rate broad circulation simply because it wasn’t money. Gravitation toward gold is an admission from Russian monetary authorities of what money actually is.
After which, Russia’s decision to create a commodity link for its official currency has predictably resulted in all manner of dopey commentary about gold exchange standards more broadly. Supposedly the gold/ruble link is threatened by Russia running out of gold. If the monetary mystics are to be believed, a shrinking gold supply was the reason that President Nixon mistakenly severed the dollar’s link to the yellow metal in 1971. The view about what forced Nixon’s hand is popular, but it’s also total nonsense.
A gold exchange standard realistically requires no gold at all. Figure that it wasn’t until the 1930s that the U.S. had substantive gold in reserves after FDR instituted a policy of confiscating private holdings of the commodity. Before then, the dollar had been defined in gold terms without regard to what the federal government had in storage. What was in storage didn’t matter. Really, who would exchange an interest-bearing asset for a commodity with very few industrial uses? Which is the point. Or was the point.
To which it will be answered that some would take gold over “money” based on a lack of trust in the standard. Which is true, and it’s the point right now. While gold-defined money is just an implicit expression of the truth that good, transaction-enabling money is a stable measure of worth throughout time, what really matters at this point is the market’s trust in Russia’s new policy. Put another way, Vladimir Putin can link the ruble to gold, euros, cigarettes, or name your commodity, but if producers don’t trust the peg then the currency will not be circulated.
Which means the ruble link to gold perhaps signals seriousness on the part of the Russians that they want the ruble to exist going forward as a stable measure of worth. Figure that most monetary authorities lend their money forms credibility through a link to the floating dollar. So do most private, “stablecoin” issuers of exchange mediums. In Russia’s case, it’s going for the real deal as it were. Gold has defined money for thousands of years not based on faith, but because it’s the commodity least affected by everything else. Gold tells the truth.
That gold is a truth teller speaks to the importance of what Russia’s doing. While some can and will argue that a nauseatingly sick invasion of Ukraine was the instigator of Russia’s announced currency link, for the purposes of this piece it’s useful to separate the two. Floating money renders commerce less likely for reasons previously expressed, while stable money logically makes trade much more likely. Given the historical truth that trade is easily the greatest catalyst for peaceful relations among the people who populate countries, it should be said that Russia’s currency decision is a good one, and one that the growth and peace loving around the world should cheer.
