The Free Trade Alternative to Bretton Woods and Regionalism as the EU and ASEAN

The International Clearing Office Icon

August 1, 2021

The International Clearing Office requires no finance of its own. It does not have to create a new international currency. It is impossible:

  • to disentangle the mass of individual transactions which give rise 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 not 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.

It would be of no economic significance if a new international currency were created*. The holding of “a share in the Pool” would then be called a holding of “world currency”, but the backing of the world currency would none the less be nothing else but the cash balances in the deficit countries.

*Superphysics Note: Here, we agree with Schumacher and disregard any new currency like the Bancor

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 of countries with no surplus nor deficit will hold neither cash nor a share in the Pool.

*Superphysics Note: In Pantrynomics, the surplus countries become indebted to their own citizens who make prepayments that can be used overseas, as a sort of import or purchase of the services of the other countries like tourism, medical services, or education. This increases local employment globally at the expense of international finance which is Mercantilist banking to Adam Smith

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. Thus, it will decrease the amount of cash in 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. Thus, it will increase its cash 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 effect.

There is nothing in the technical set-up 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.
  • 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 of any new system isthe achievement of such global balance. Many bilateral trade problems exist:

  • 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.

Free Trade

But balance is not an end in itself. The task is to achieve balance at the right level. That level should be determined by those countries that need foreign goods. This is the only possible meaning of the “Free Access” clause in the Atlantic Charter. 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”.

Under 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. 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.

Our scope is exclusively on gainful trade. A system of multilateral clearing may be superior to a system of many bilateral clearings. But both are:

  • merely technical systems, and
  • dependent on more fundamental factors.

The maximisation of economic benefits from international trade can be facilitated but not automatically assured by any purely technical system.

How would Pool Clearing affect those more fundamental real factors?

Negative Balances

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:

  • payments for foreign goods and services*,
  • interest, dividend and amortisation payments on old and new foreign debts, etc.

*In Pantrynomics, the deficit country pays through its exports or services, not through the international money market. A surplus country might print money to fill its own Clearing Fund. However, this will cause inflation and raise the price of its own exports

Only new capital movements would have to be dealt with specially, whether they arise out of commercial lending or a private flight of capital. 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, and
  • 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*.

*In Pantrynomics, funds are seeded by giving the importing country free surplus goods of productive exporting countries.

How should these facilities be quantitatively determined?

  1. Each country might let its National Clearing Fund to run into debt with the internal money market up to a specified amount [Supply-side]
  • After that amount has been reached, exporters would receive payment only to the extent that means of payment have been made available by importers.
  1. Each country might be given a maximum limit for its Clearing Fund [Demand-side]
  • This approaches the problem from the angle of the recipient of the overdraft
  • After that limit is reached, the Clearing Funds of the world would no longer process transactions from the overdrawn Clearing Fund – they would refuse to make further payments to their home exporters for goods delivered to that country

These two methods stop (or ration) deliveries to the overdrawn country. But their effect on the rest of the world is different.

Let us assume that six countries agree to allow the five others jointly an overdraft not exceeding 10x.

  • If all countries. except one, have a trade surplus, the remaining one can go on accumulating deficits up to 50X, which may be grossly excessive.
  • But if these 6 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 5 countries become deficit countries each using its overdraft facilities to the full, and
    • that 1 country remains as the sole creditor on Pool Clearing account to 50x.

The first method of limitation makes it clear to each participant country what is its maximum stake in the Pool. If this were chosen, the maximum overdraft facility of each country would have to be kept so low. No country could ever become excessively indebted. This would rob the whole system of all its potentialities.

The second method makes it clear to each participant what is its maximum indebtedness to the Pool. 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 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. For a start, pre-war trade would have to be taken as a standard. If 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.

It is not suggested that there should he a new overdraft every year. The “maximum overdraft” might be considered as a revolving credit, the size of which fluctuates with the yearly volume of exports.

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?

Surplus Balances

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.

As opposed to a bilateral set-up, 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 buying more from other countries.

  • This will not solve the British deficit, if there is one.
  • But it solves Argentina’s problem.

The point is that each country can with the greatest ease and freedom:

  • avoid the accumulation of a surplus, and
  • reduce it once it has come into existence.

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.

Such failures can occur. Under the Gold Standard (or any other international monetary system based on free convertibility), they led to the general pursuance of a beggar-my-neighbour policy. Most countries during the 1930s strove desperately to make up for the deficiencies of home investment by export surpluses.* Those who succeeded reaped a double advantage. They increased home employment and accumulated either gold reserves at home or capital investments abroad.

*Pool clearing can solve stagnation by letting countries export their way out of it.

Under Pool Clearing, a similar trend would assert itself if the participating states failed to achieve a constant high level of employment at home. But it would take different forms. The surpluses arising out of current trade could not be converted into gold or interest-earning assets. They would be held as a precarious and barren investment. It might be that this deterrent against surpluses, or this incentive to import, would prove insufficient in a severe home unemployment crisis. But at least it is a force in the right direction which is absent from most other systems.

Any discouragement of surpluses might be thought to lead nations to limit their exports rather than increase their imports. But this is unlikely.

The temptation to aim at export surpluses is greatest when there is home unemployment. Restricting exports voluntarily just then would not recommend itself to any nation. If export surpluses are made unattractive by Pool Clearing, the speeding up of imports by expansionist internal government policy will be sought instead of slowing down exports. If this is so, the system would strongly expand world trade. It would be different from the pre-war system when every international trade disequilibrium immediately led to restrictive forces.

The aim must be to achieve balance in the trade of every nation.5

Balanced Trade

Such balance can be most easily achieved if potential surplus countries are discouraged from achieving a surplus.

An attempt to throw the burden of adjustment primarily on the shoulders of the deficit countries (as in the past) is bound to fail, or at least to lead to competitive trade restriction.

A surplus in one country leads to deficits in other countries as light produces shadow. It is easier to spend additional amounts than to earn additional amounts. This is why any new system of international trade should let all its inherent forces induce the surplus countries to dissipate their surplus, rather than inducing the deficit countries to to increase their exports or restrict their imports.

Pool Clearing would force the surplus countries to avoid importing. But there are limits even here. One of the countries might simply be unable to offer, at the right price and delivery dates, the goods to pay for all their purchases. The evidence of this would be that their deficits showed a strong and apparently irresistible tendency to rise to their limits. It is in the interest of all countries that the maximum limit should not be reached, because otherwise exports to the “overdrawn” countries might have to be rationed by direct intervention. In this case, the system for the “overdrawn ” country would probably degenerate into Bilateralism.


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