Schumacher's Simplified Multilateral Clearing
This is the simplified version of Schumacher's Multilateral Clearing which was used by Keynes for his International Clearing Union and Bancor proposal in Bretton Woods, which were not accepted as they would regulate world trade. We build on Keyne's ideas and merge them with those of Adam Smith to create a social multilateral free trade system which is based on gold or grains, as part of social resource allocation system. Unlike the WTO which categorizes trade items and sets rules for each category as quotas and tariffs, our resulting Social Free Trade Association (SOFTA) deals with total trade values and in clearing trade imbalances by analyzing the resulting grain values> of products and commodities.
Assume that there is only the US, Britain and Poland
- America sells more than she buys, as a surplus country
- Britain sells just as much as she buys, as a balanced country
- Poland buys more than she sells, as a deficit country
Multilateral clearing implies that in this case Britain should be “out of it”
- But Britain is released from these obligations only if the Americans are prepared to exchange their sterling-balances for Britain’s zloty-balances.
- Why should they be prepared to do this?
- Sterling balances (on our assumptions) are preferable to zloty-balances, because Britain, at least, is a country which has achieved “balance” in her total trade, while Poland is a deficit country.
- Why should the Americans exchange a better currency for one that is worse?
- If they can be made to do so, then we can have multilateral clearing
Multilateral clearing exists in Europe.
- Germany forces the surplus countries to agree to the necessary exchanges of uncleared balances so that:
- the countries which have achieved balance are relieved of all claims and liabilities from the bilateral clearings, and
- the surplus countries simply remain as the creditors of the deficit countries.
How can multilateral clearing be achieved without the application of force?
- Every country sets up a National Clearing Fund.
- They agree on the rates of exchange by which each currency is to be related to all other currencies
- Importers pay into their own National Clearing Fund using their own currency.
- The exporter's National Clearing Fund is informed that payment has been received
- The exporter's National Clearing Fund pays the exporter
- Each National Clearing Fund thus receives and disburses only national currency
- it receives such currency from the home importers and disburses it to the home exporters.2
Assume this goes on for 12 months and each Fund has 3 outcomes:
- Deficit countries will have excess local currency from importers
- Surplus countries will be short of local currency for exporters
- Balanced countries will be in same position as 12 months before
- Deficit countries will spend the money buying Tbills.
- Surplus countries will sell Tbills to get cash
What would be the position of ownership of the deficit countries?
- America sells 10x more to Britain
- Britain sells 10x more to Poland
- Britain having achieved balance is no longer concerned
It follows that America owns a balance of 10x in Poland.
- Her Fund has received an extra 10x from importers and disbursed an extra 10x to exporters.
Thus the surplus country owns the cash balance in the Clearing Fund of the deficit country.
- A sterling-balance, which the Americans could own, simply does not exist.
But what if there are more than three countries?
- America sells 10x more to Britain
- Britain sells 8x more to Poland and 4x more to Holland
- America has a surplus of 10x
- Britain a surplus of 2x
- Cash balances of 8x and 4x are held in the Funds of Poland and Holland respectively.
They belong to whom?
- What proportion of the zloty-balances and of the guilder-balances belongs to America and what to Britain?
- This cannot be answered unless the time sequence of all individual transactions were meticulously studied
- The balances in the deficit countries have lost their identity.
- The innumerable threads of business cannot be disentangled.
- 83% of the total of balances in Poland and Holland belong to America
- 16% belong to Britain.
- This is the decisive feature of “Pool Clearing”.
The pooling of balances arises automatically out of the system's mechanism.
- No surplus country is ever called upon to exchange one balance for another.
- Under bilateral clearings, America—in our example—would possess the sterling-balances even if Britain had achieved balance or even if Britain were a surplus country herself.
- To multilateralise such a system, America would have to be forced against her immediate interest to swap her sterling balances against Britain’s balances in the deficit countries.
- There would be no country strong enough to enforce such swapping on a world-wide scale.
- Under Pool Clearing this whole question never comes up.
- Any such cash balances in the various Funds are always the result of a deficit in the total trade of the countries in question.
- Mere bilateral trade deficits do not create the appearance of uncleared balances, unless they represent at the same time deficits in total trade.
- The pooling of balances arises automatically
- But we still need to create some international machinery to give to this process a legal form.
- An “International Clearing Office” can be set up as Trustee in the pooling of uncleared balances.
- All cash balances accumulating (in the form of a holding of Treasury Bills) in the Clearing Funds of the deficit countries are to be taken over by the International Clearing Office.
- The Clearing Funds of the surplus countries will own each a share in the Pool, equal to the size of their respective surpluses.
- The International Clearing Office requires no finance of its own.
- It does not have to create a new international currency.3
- Since it is impossible to disentangle the mass of individual transactions which give rise, during the course of business, to the various uncleared balances in the deficit countries and to ascribe any one particular balance, or part of it, to any one particular surplus country, the Gordian knot is cut by making all the surplus countries the joint owners of the balances in all the deficit countries.
- In this way every national currency is made into a world currency.
- The creation of a new world currency becomes unnecessary.
- The International Clearing Office—in this connection—does require any special powers.
- It is not an agency for control.
- It is a purely administrative body, the central accounting office for the different National Clearing Funds.
The Clearing Funds of surplus countries become indebted to their internal money markets and acquire an equivalent share in the Pool, both their debt and their share in the Pool being equal to their trade surplus.
- The Clearing Funds of the deficit countries are left with balances of cash in hand (equal to their trade deficits) which belong to the International Pool.
- The Clearing Funds, finally, of countries whose balance of trade has left neither surplus nor deficit hold neither cash nor a share in the Pool.
This system is fully multilateral.
- It is immaterial to each individual nation where it buys or sells.
- Whether it sells to a deficit country or to a surplus country, its National Clearing Fund will disburse national currency to the exporters at home and thereby decrease the amount of cash held by the Fund or increase the debt owed by the Fund to the internal money market.
- Whether it buys from a deficit country or from a surplus country, its National Clearing Fund will receive national currency from the importers at home and thereby increase its cash holding or reduce its debt to the internal money market.
- All individual sales and purchases have the same technical effect, irrespective of the country to which goods are sold or from which goods are purchased.
They have the same technical
- There is nothing in the technical set-up of this system to induce any individual importer or exporter to choose his sources of supply or his markets with reference to his country’s bilateral trade balances.
- Under a regime of a multitude of bilateral clearings this would be quite different : each country would always have some clearings with a trade surplus and some with a deficit.
- Britain, in our example above, would have ready cash for additional imports from Poland, but not for additional imports from America
- America would have ready cash for additional imports from Britain, but not for additional purchases in Poland.
Under Pool Clearing, these differential stimuli do not exist
- The identity of ownership of the various balances accumulating in deficit countries (and in deficit countries only) cannot be separately established.
- And the main stimulus that remains is for the surplus country to spend its surplus—anywhere in the world.
This is a great advantage, because:
- it avoids the dangers and frustration of Bilateralism and
- allows world trade to flow according to whatever economic criteria may exist for the international division of labour, instead of setting up the arbitrary criterion of bilateral balance.
A trading system that enforces strict bilateralism is arbitrary and discriminatory
- The same does not necessarily apply to a system that enforces balance in the total trade of each country.
- The principal aim, in fact, of any new system should be that the achievement of such global balance be facilitated.
- Many bilateral trade problems exist:
But balance is not an end in itself.The task is to achieve balance at the right level.
- A surplus country might be unwilling to increase its purchases
- A surplus country might drain other countries of all their liquid means for making international payments and may even force them into default.
This is the only possible meaning that can be attached to the “Free Access” clause in the Atlantic Charter
- That level should be determined by those countries that are in need of foreign goods.
Under a regime of bilateral clearings, each country has free access to the trade and raw materials of those other countries which are its customers.Under Pool Clearing access to trade is universally free.
- It promises “enjoyment by all States, great or small, victor or vanquished, of access, on equal terms, to the trade and to the raw materials of the world which are needed for their economic prosperity”.
Yet, no matter what is the technical set-up, every country must ultimately pay for what it buys.
- It must be able to supply as much in goods and services to the rest of the world as it receives.
- This does not deny the possibility of making international gifts, grants-in-aid, Lend-Lease, or reparation payments.
- But they fall outside the scope of our investigation.
A system of multilateral clearing may be superior to a system comprising a multitude of bilateral clearings.But both are
- Our scope is exclusively on gainful trade
The maximisation of economic benefits to be derived from international trade can be facilitated but not automatically assured by any purely technical system.
- merely technical systems
- dependent on more fundamental factors.
How would Pool Clearing affect those more fundamental real factors?
- In this system, we can give every country the right to discharge all its cash obligations to the rest of the world simply by paying its own national currency into its National Clearing Fund.
- Every Clearing Fund would be entitled to receive any payment that arises out of international economic exchange, i.e.
- payments for foreign goods and services
- interest, dividend and amortisation payments on old and new foreign debts, etc.
- Only new capital movements would have to be dealt with specially, whether they arise out of commercial lending or a private flight of capital.
- They will be discussed later.
Whenever a National Clearing Fund receives payment from a resident at home who wishes to discharge a debt abroad:
- it notifies the National Clearing Fund in the payee’s country
- the latter makes payment to the payee.
In this way, each country gives to each other country an overdraft facility for foreign payments.
- This might be a good way of getting world trade started again after the war when most countries will find themselves without any international means of payment.
- But it cannot be expected that any country would wish to give to the rest of the world an unlimited overdraft upon its own resources.
How should these facilities be quantitatively determined?
There are two possibilities:
- each country might decide that it is prepared to allow its National Clearing Fund to run into debt with the internal money market up to a specified amount.
- After that amount has been reached, exporters would receive payment only to the extent that means of payment have been made available by importers.
- Or one might approach the problem from the other side: not from the angle of the granter of the overdraft, but from that of the recipient.
- Each country would be given a certain maximum limit beyond which the cash balance in its National Clearing Fund would not be allowed to rise.
- After that amount had been reached, the Clearing Funds of the world would take no further notice of notifications coming from the Clearing Fund of the “overdrawn” deficit country
- They would refuse to make any further payments to their home exporters for goods delivered to that country.
These two methods of imitation come to the same in that they lead to a stoppage (or rationing) of deliveries to the overdrawn country.
- But their effect upon the rest of the world is quite different.
- Assume that there are six countries and each agrees to allow the five others jointly an overdraft not exceeding 10x.
- If all countries but one then have a surplus of trade, the remaining one can go on accumulating deficits up to a total of 50X, which may be grossly excessive.
- But if these six countries agree amongst themselves that no single country should be allowed to have a trade deficit exceeding 10x, then the worst that might happen is that five countries become deficit countries each using its overdraft facilities to the full, and one country remains as the sole creditor on Pool Clearing account to the tune of 50x.
Which of the two methods to choose involves a question of principle.
- The first method of limitation makes it quite clear to each participant country what is its maximum stake in the Pool.
- If this were chosen, the maximum overdraft facility each country is to give would have to be kept so low
The second method makes it quite clear to each participant what is its maximum indebtedness to the Pool.
- No one country, no matter how small, could ever become excessively indebted
- This would rob the whole system of all its potentialities.
- This method is the only workable one
- If this were chosen, a maximum could be worked out for each country, adjusted to its normal trade turnover
- It would be left to each surplus country to see to it that its own surplus did not become excessive owing to a deficiency of purchases.
The actual determination of these upper limits is not difficult
- The leading nations of the world would have to
For a start, pre-war trade would have to be taken as a standardIf the same formula is applied to all countries, there will be no occasion for special bargaining and detailed negotiations.As the trade of any one country expands or contracts, so will its maximum deficit be allowed to increase or decrease.
- agree on some definite formula (e.g. 30% of yearly exports as the maximum overdraft)
- Then invite all the other nations to join in on these terms
Assume, then, that appropriate limits have been fixed for the deficit any one country will be allowed to incur, and the system is put into operation.
- It will work smoothly as long as every nation avoids exceeding the deficit limits
- In this respect it would be analogous to a Gold Standard system
- It works satisfactorily as long as deficit countries balance their foreign exchange income and expenditure in such a way that their gold reserve remains intact
What forces operate within the system to facilitate this task?
The main force is the fact that the holding of surpluses becomes unprofitable and risky.
- The surplus, instead of being convertible into gold or interest-earning investments, is tied up in the Pool:
- It is a share in the Pool
- The Pool’s assets are always the weakest currencies of the world
- It is the currencies of the countries that have been unable to earn as much as they have spent
In contradistinction to a bilateral set-up, however, Pool Clearing gives to each country the fullest opportunities to avoid becoming a surplus country:
- it can allow its importers to buy freely anywhere in the world, without regard to bilateral trade balances.
- If Argentina has made large deliveries to Great Britain, she can avoid becoming a surplus country by increasing her purchases from other countries.
- This, of course, does not solve the problem of the British deficit, if there is one.
The point is that each country can with the greatest ease and freedom
- But it solves Argentina’s problem.
If Argentina were tied down to spending all the proceeds of her exports to Britain on British goods, she might experience difficulties in finding suitable and competitive goods on the British market.But if she is entirely free to spend her money wherever she likes, then any failure to spend on imports as much as has been earned on exports can only be a failure of effective demand within Argentina.
- avoid the accumulation of a surplus and
- reduce it once it has come into existence.