In a previous essay, I pointed out that it is very likely that the US will isolate itself from the worldwide trading system due to its past—frankly unlawful—actions to steal the assets of other countries and the increasing assault on the purchasing power of the dollar. My goal was to recommend actions that the US government could adopt to reassure its trading partners that neither outright theft of assets or decline in the purchasing power of the dollar could happen. My two main recommendations were that the US readopt a gold standard and, one, move its gold to a neutral country when dollars could be exchanged for gold and, two, move the SWIFT messaging system for international trade settlement to a neutral country also.
Although I believe that these actions would save the dollar and the worldwide dollar trading system, the likelihood of either happening is very slim. So, what to do? Moving SWIFT to neutral hands, say the Swiss, undoubtedly would be more acceptable for US statesmen than moving our gold reserves overseas. So, barring that solution, we must think outside the box, so to speak. What can we do to reassure our trading partners that we will pay for their exports to us in stable money?
Settle International Trading Accounts in Gold
The answer is to not settle in dollars at all, but settle in gold. In other words, revive the worldwide gold standard for international trade. The mechanism for accomplishing this feat has been proposed by Alasdair Macleod. The BRICS countries have discussed using a basket of currencies, which might include some gold. But Alasdair Macleod believes that this is impractical and not a stable solution. He has proposed a much simpler mechanism. With his approval, I quote him directly,
As an alternative, I proposed an independent and new issuing authority for BRICS which would take in gold from member nations and issue gold substitutes in return based on Isaac Newton’s idea of 40% backing. So for every 100 tonnes deposited, a CB would get reserves in gold substitutes to the tune of 250 tonnes equivalent. My reasoning was that a central bank would be happy to increase its reserves in this fashion appearing as a balance sheet asset, against which commercial bank reserves could be held (liability to the CB) thereby guaranteeing the value of credit issued by the banking system denominated in the new currency.
The purpose was for international trade settlement rather than replacing national currencies, but national currencies could be linked to it at a fixed exchange rate should a nation so desire.
A gold vault and a gold bank would be established in, say, Switzerland. Each BRICS country would send enough of its gold reserves to the gold vault that it could settle its net trading position in gold credits through the gold bank. Notice that the settlement would be only its “net” position. Some days a country’s net position might be negative, meaning that the gold bank debits that country’s account. But some days the net position would be positive, meaning that the gold bank would issue a credit. It would be up to the participating countries to send enough gold to the gold vault only for anticipated net debit positions. If a country ran persistent net negative positions, which would be settled in gold, it would have to send more gold to the vault and probably reform its internal economic policies, such as raising interest rates to increase savings and moderate loan demand. The market itself would dictate and enforce these moves, not any single or combination of nations themselves.
Bankers will notice that international trade settlement is little different in application than the way that commercial banks settle check and electronic clearing each day either through a local clearinghouse or, most likely, through their reserve account at the Federal Reserve Bank. I’m sure the mechanism is the same in all developed countries. Checks presented for payment reduce the bank’s clearing account balance, whereas checks presented against other banks increase the clearing balance. If a commercial bank runs persistent net debits, it has to send reserves to its Fed account. It does this by selling assets, probably US Treasury Bills, calling in loans, or even borrowing reserves via the Fed Funds Market from other commercial banks who have excess reserves.
Hierarchy of Methodological Individualism
It’s all part of human action based on methodological individualism. Participants at all settlement levels desire to be paid in a sound medium of indirect exchange. The lowest level of settlement is trade between individuals. Your son wants to be paid for mowing the lawn, for example, but he may be willing to accept borrowing the family car in lieu of payment. However, if your neighbor’s son did the work, he’ll require cash. This is the first, base level of settlement.
The second level of settlement is between banks. The first indication that a bank is having financial trouble is that it runs persistent debits at the clearinghouse. Individuals and businesses that borrowed and spent more than the bank’s available pool of savings must moderate their spending. This relieves the daily settlement pressure on their local commercial bank.
The third line of settlement is between central banks. Persistent debit settlements by central banks are the first indication of a nation’s growing financial insolvency. Internal economic reform in the form of higher interest rates, lower government expenditures, and minimum economic regulations are required in order to stop the outflow of gold. If earth ever traded with aliens from outer space, the issue would be the same. The Earth’s Bank for International Settlements would have to find some intergalactic medium of exchange that would be acceptable to Earthlings and to Martians!
Stated another way, we may say that country A trades with country B, but the underlying reality is that certain people in country A trade with certain people in country B. International settlement is merely an aggregation of lots of individual trades.
The Trickle-Down Benefits of an International Trade Settlement System Based on Gold
In effect, the world would be back on a gold standard for international trade. There is every reason to believe that this process of trading and settling internationally with gold would trickle down to intra-country trades. Although countries would not interfere with one another’s internal policies, a country that failed to produce real wealth would not be able to export enough to buy sufficient gold to pay for its imports. In other words, a nation’s internal currency would be tied to gold, making international trading terms, which are denominated in gold, easier to understand, and making forecasting future currency needs easier to predict. Companies would find it more accurate to predict the likelihood of future profits. All this would flow naturally from the international gold settlement system.
America needs to anchor its currency in gold in order to trade internationally. This would force the federal government—which has papered the world with fiat dollars—to balance its bloated and unsustainable budget. There is little appetite for countries to expand or even maintain trade with America unless they were paid in sound money (i.e., gold). A wise American government would agree to join such a system and not try to force other countries to use the dollar by threatening them with tariffs and sanctions. Such bullying tactics may appear to work in the short term, but they are not the basis for long term success. Americans may not realize it, but they need access to the worldwide trading system, which means that they need to join other nations in a single worldwide trade settlement system. In the long run, America cannot afford to be isolated economically.