For many months now Alasdair Macleod of Goldmoney.com has been writing about the
efforts of a group of non-Western nations, led by Russian economist Sergey
Glazyez, to establish a new settlement system for international trade. For many
months I have been carefully following Mr. Macleod’s explanations of this
initiative and have been privileged to correspond with him to gain a better
understanding of what may well be the most momentous and consequential economic
and financial initiative in decades. Therefore, much of what you read here has
been vetted by Mr. Macleod, although I take full responsibility for any errors
that may have arisen due to my lesser understanding.
The impetus for the creation of a new currency for international trade
settlement stems from two sources. The first was the continued debasement of
the current medium of international trade settlement—the US dollar, since 1944
the world’s premier reserve currency. For many years the dollar’s value has
been steadily weakened, so that today it is worth only two cents of its value
in relation to gold in 1971, the year that President Nixon closed the US gold
window. Since the Bretton Woods Agreement in 1944 until the autumn of 1971, the
US had pledged to redeem dollars for gold at $35 per ounce. The world trusted
that the US would not expand its money supply without first accumulating more
gold to back the new dollars at the agreed upon exchange value. Of course, the
US cheated almost from day one, but especially after the end of President
Eisenhower’s administration in 1960 and the expansion of the US welfare/warfare
state under Presidents Kennedy and Johnson. It didn’t take long for astute
economists in Europe, initially in France, to figure out what was happening.
The predictable run on the US gold supply ensued, forcing Nixon’s hand. To his
everlasting discredit he took the short-term, easy way out. His alternative would
have been to devalue the dollar to gold and pledge to end dollar debasement.
The second impetus came from the sanctions directed at Russia and a few
others, which froze Russia’s dollar assets in Western banks (some would call
this theft) and cut Russia out of the SWIFT international messaging system used
for settling trade. Iran, for example, had been the cut out of SWIFT previous
to the Russian invasion of Ukraine and has signaled its intention to join this
new system. The West has infuriated many non-Western nations by using financial
and economic sanctions as punishment over non-trade issues. Commentators call
this “weaponization of the dollar”. But the non-Western nations are building a
better system to using the dollar as the reserve currency and SWIFT as the
messaging system.
Establishing
a Gold Currency for Trade Settlement
In his recent (February 23, 2023) weekly essay, Alasdair Macleod moves
from the theoretical to the practical steps that are required to establish this
new settlement system. He titles his essay “CBDCs—The
good, the bad, the ugly”. The term “CBCDs” refers to Central Bank Digital
Currencies. Mr. Macleod quickly explains that there is no need for CBCDs to
establish the new trade settlement system. Ordinary accounting systems and
clearing house mechanisms are perfectly capable of dealing with international
trade accounts; therefore, any foray by central banks into establishing their
own digital currencies is for other, possibly nefarious, purposes. Thus, the
“bad” and “ugly” role of CBDCs to which Mr. Macleod alludes.
The key insight for the establishment of a new trade settlement system
is to create a new gold backed currency. Macleod’s eight bullet points lead the
reader through the process. Once understood, one sees its simplicity and
inherent stability and honesty. A “New Central Bank” (NCB) will be established
in which each member nation’s central bank has a gold currency account. The
size of the account depends upon how much gold the member houses in one of the
system’s approved vaults. The size and stability of each member’s internal
currency becomes less relevant. What is important is the size of its gold
holding.
So, immediately we see that a third party ensures that payment in
specie cannot be abrogated, as the US did in 1971, because the gold used for
trade settlement will be housed outside any single member’s control.
Net
Settlement Will Not Require Vast Amounts of Gold
The system of net settlement is the same, in a mechanical sense, to that
of ordinary intra-national check settlements. Commercial bank customers accept
checks drawn on many banks during their business day and deposit them at their
local bank. The local bank sends these checks to a branch of its central bank
for credit to its central bank account, called a “reserve account” in the US.
All other banks do the same. Some banks deposit more money drawn on other banks
than other banks deposit drawn on them. And the roles change every day; i.e., a
bank deposits more some days than is presented against it and vice versa the
next. So the net settlement is seldom very large, one way or the other. The
same mechanism pertains to international settlement with gold backed money units.
A key point to note is that the financing of trade is not settled by
the new currency itself, but in commercial bank credit denominated in it.
Whether an individual trade transaction is financed and on what terms is always
a commercial banking decision and should not be a matter for government
policies. Each nation need deposit only enough gold at the New Central Bank to
give its regulated commercial banks the credibility to issue bank credit based
upon the new currency. If a nation runs consistent settlement deficits, its
credibility for trade financing purposes may start to dwindle and the cost of
obtaining credit in the new currency will rise. This is a market signal to
reform ones internal economy in order to participate in the wider world economy,
for imports are funded by exports. The member running consistent deficits can
always send more gold to one of the member-approved vaults in order to continue
to import.
It is the market rating of a commercial bank’s creditworthiness which
sets its ability to discharge its obligations to depositors in the new
currency, not access to the new currency itself. That remains available to
participating central banks only, available to swap with other member central
banks if needed in a crisis. A commercial bank
that extends too much credit too quickly in the new currency unit and loses the
market’s confidence is a problem only for the bank and its customers. The
currency is unaffected. The market is the disciplinarian.
Export prices will be established in the export market, denominated in
gold money prices. For example, a barrel of Saudi oil may be priced in gold
money of two to three units, which is completely independent of the dollar,
yuan, rupee, etc. price in internal markets. What matters most is that the
importing country has sufficient credibility among its peers to settle its
daily trade account in the trade currency.
The New Central Bank will adopt a forty percent ratio of gold to gold
money, a ratio that was adopted by Sir Isaac Newton when he was master of the
(British) Royal Mint which has stood the test of time. This will enhance the
value of gold reserves otherwise maintained by a central bank by two and a half
times.
(Please see the appendix at the
end of this article in which Mr. Macleod explains the relationship between the
New Central Bank, the participating national central banks, and the members’
commercial banks themselves.)
Keep
Trade from Being Used as a Geopolitical Tool
Many in the West may not think about the falling purchasing power of
the dollar and its effect on international trade settlement as a big problem in
their everyday lives. Also, they may agree with the Russian sanctions, high
handed and possibly illegal though they may be, as giving Russian despots their
just desserts. But I think that Macleod sees a much bigger problem with such
short term thinking. Let me offer this scenario. Would you rather live in a
world in which a criminal gang controls money production and can print as much
as it desires for itself and its friends, not taking into account the damage
done to the larger society in which you live, or would you rather live in a
world in which no one can produce money ex nihilo for his own benefit? Would
you rather live in a world in which a criminal gang can freeze your bank
accounts, denying you the ability to buy food, fuel, shelter, etc. or would you
rather live in a world where the rule of law protects your civil liberties and
your property? I think I know the answer that most freedom loving people will
give. Therefore, it should not be a surprise that many nations of the world
agree with you on these issues as applied to world commerce. The steady
depreciation of the dollar and the high-handed sanctions are turning into the
Achilles Heel of the Western controlled international trade system. The rest of
the world has decided that it has had enough and is taking matters into its own
hands, difficult though that process may be.
The new system, owned by all the members and controlled by no one
member, should not veer from its specified purpose of settling international
trade accounts. Nor can the medium of exchange (gold) be debased. It is an
honest, strictly limited in scope trade settlement system only. Geopolitical
issues will be settled in more appropriate forums where each side can present
its grievances.
One can hope that continuing trade with a country with which one has a
temporary geopolitical issue may actually result in a quicker and more
harmonious resolution. In any event, we must remember that people trade with
other people and that nations do not trade with other nations. Using the trade
of ordinary people as geopolitical tools should be reduced somewhat, forcing
diplomats and statesmen to do their duty and find diplomatic and statesmen-like
solutions. Well, one can only hope.
Appendix by Alasdair Macleod:
In this detailed explanation, the New Central Bank is the NCB and
a participating central bank is the PCB.
Commercial banks can access credits representing the new currency
in the form of deposits, conventionally labeled reserves, through their account
at a PCB. This can be funded simply by depositing the PCB’s national currency,
or any other currency which can be sold on the foreign exchanges, in exchange
for a credit representing the new currency in favour of the commercial bank.
The only accounts maintained at the NCB are with participating
national central banks. In return for a gold deposit, the NCB credits the
participating central bank with the new currency 2.5:1 — in other words a 40%
reserve. This is an obligation of the NCB in favour of the PCB, and in effect
creates the currency in accordance with a strict formula.
The PCB records the new currency on its balance sheet as an asset.
In other words, it is an obligation of the NCB in favour of the PCB.
The book entries are as follows: the PCB records its credit
obligation in its favour from the NCB in the new currency as an asset. If a
commercial bank wants credit access to the new currency, it sells domestic or
other acceptable currency to the PCB in return for a deposit, which is a credit
obligation between the PCB and the commercial bank. And if the PCB wishes to
operate a minimum reserve policy in the new currency, it is free to do so. That
is a matter between it and its own commercial bank network, and does not
involve the NCB.
Alternatively, if through circumstances the PCB agrees to make a
loan to a commercial bank in the new currency, it will be free to do so by the
normal process of credit creation, whereby the loan denominated in the new
currency is created in favour of the commercial bank (recorded as an asset on
the PCB’s balance sheet), with a matching liability recorded as a deposit (on
the liability side of the PCB’s balance sheet) upon which the commercial bank
can draw. This is how a discount window currently operates, and similarly will
be seen as last resort funding by commercial banks. Furthermore, it allows the
PCB to participate in the commercial banking clearing system.
Banks based in jurisdictions which are excluded from participation
at NCB level, or choosing not to join can still participate by setting up
branches or subsidiaries in participating jurisdictions, if the relevant PCB is
prepared to authorise an account.
Note that in this structure, no extra currency is created by the
NCB. In fact, only the NCB can create new currency. In effect, the new currency
is ring fenced, and only expanded if a PCB deposits more gold with the NCB.
Therefore, all credit based on it becomes firmly tied to the new currency, the
only variation in value being in the discount rates (interest) which reflect
individual counterparty risks and time preference, if appropriate.
The expansion of credit based on the new currency is not an
inflationary concern, because the new currency is used to facilitate production
from commodity acquisition to final product, and not for financing consumption.
Furthermore, the mechanical tie to gold bullion is the ultimate guarantee of
the currency’s value and that of all credit based upon it.
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