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 signalled 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.