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What is at the core of the monetary tension between the United States and China?
Director of international economics at the Council on Foreign Relations Benn Steil, co-author of Money, Markets, and Sovereignty (Yale University Press, 2009), perceptively observes:
China’s position on imbalances is also the same as the US position at Bretton Woods: the debtor should bear the burden of adjustment. In the present context, that means tighter US monetary and fiscal policy, as would be required under a classical gold standard (that is, the United States sends a dollar to China, China redeems it for gold, US gold stocks fall, policy tightens to draw gold back, imbalances fall). But now that the United States is a massive debtor, rather than the creditor it was at Bretton Woods, it rejects the logic of debtor adjustment.
So where does this stalemate leave us? The United States seems happy to continue the game of chicken, reckoning that as long as China refuses to appreciate its currency, it has no choice but to continue to gobble up low-yielding dollar debt. Despite warnings from Governor Zhou and other top Chinese officials that it will seek alternatives, the United States doesn’t believe China has any. A move by China to diversify into other currencies would slam the purchasing power of its huge stock of dollar assets. China would not cut off its nose to spite its face.
But there are alternatives. One that China, India, and others have been pursuing is building up their stock of gold reserves. Swapping dollars for gold, rather than other currencies, can sidestep, at least temporarily, an undesirable exchange-rate shift. And gold would probably do at least as nicely as dollars in a crisis.
--from "China, the dollar, and the return of the Triffin dilemma," 12 January 2010 at McKinsey & Company's What Matters
The stakes could hardly be higher. Steil concludes:
But the more worrying alternative is the one China is already pursuing with Brazil and Russia: trading without dollars. If countries could avoid having to use dollars in trade, the US government would be compelled to be more prudent in printing, borrowing, and spending them. But the only way for China and others to conduct trade without an internationally accepted currency, like the dollar, is to balance it bilaterally with their partners. This would mean systematic trade discrimination, and the beginning of the end of the multilateral trading system built up painstakingly since the 1950s. We would be going back to the immediate post-WWII period, when the trading system had transmogrified into a contentious web of bilateral barter. In those days, it was a dollar shortage that destroyed multilateral trading. Tomorrow it may be a dollar glut that does it. There is no escaping the Triffin dilemma.
Gold, monetized, would be the logical "internationally accepted currency" by which the multilateral trading system may be secured.
Dr. Steil seems almost to be hinting at this conclusion.
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