Tweets on International Clearing using Gold
14 April 2019 7 Comments
Do you see that the architecture of the Eurosystem is not only ready for, but actually favours this international monetary system: international clearing in gold, but local fiat currencies. It's even way superior to the (historically grown) pre-1922 arrangement.
— Victor The Cleaner (@VictorCleaner) April 14, 2019
You can see this mechanism in action before the 1920s. Just don't get confused by the fact that most countries also used gold as their medium of exchange. Always think about the price of gold relative to goods and services.
— Victor The Cleaner (@VictorCleaner) April 14, 2019
If a country ran a trade surplus, they cashed in on this surplus and asked for physical gold delivered. So gold flowed from the deficit country to the surplus country. The amount of gold in the surplus country increases, but not the amount of goods and services available locally.
— Victor The Cleaner (@VictorCleaner) April 14, 2019
Therefore, the price of gold in terms of goods and services in the surplus country *decreases*. With a gold standard, this meant inflation of the medium of exchange. In the deficit country, the opposite happens. Gold leaves the country, its price relative to goods and services…
— Victor The Cleaner (@VictorCleaner) April 14, 2019
increases (and with a gold standard the medium of exchange experiences deflation). But now real goods and also labour from the deficit country, if priced in gold (that's what was relevant internationally), become cheaper from the point of view of the surplus country.
— Victor The Cleaner (@VictorCleaner) April 14, 2019
This tends to counteract the trade imbalance that caused the move of gold that happened in the begnning of the example. This form of international clearing is self-stabilizing. It prevents the accumulation of imbalances, i.e. deficits (and also surpluses) in the long run.
— Victor The Cleaner (@VictorCleaner) April 14, 2019
Why gold? From the example, it's obvious that it should be an asset whose "quantity" does not vary much. Gold's stock-to-flow ratio comes in handy, is infact unparalleled. You cannot use credit for this (as done post-1922) because the quantity of credit can change a lot.
— Victor The Cleaner (@VictorCleaner) April 14, 2019
In fact, you would need to use physical gold for the clearing, and **it would be foolish to write credit on it** (because foreigners would not accept that – in fact that was the "rule of the game" prior to 1922). You shouldn't base credit on it. @cjenscook please read this.
— Victor The Cleaner (@VictorCleaner) April 14, 2019
At the 1944 Bretton-Woods conference, Keynes didn't propose gold, but his "bancor", but he did advertise it precisely for the mechanism described above. His proposal was indeed based on the mechanism that no country alone was able to create bancors arbitrarily.
— Victor The Cleaner (@VictorCleaner) April 14, 2019
Finally re the local currencies, the local medium of exchange. Before 1922 it was mostly gold, but the mechanism did not depend on it. In fact, you could use local fiat money and have the local central banks target zero inflation, but clear internationally in physical gold.
— Victor The Cleaner (@VictorCleaner) April 14, 2019
Then, when gold flows and the system responds to temporary imbalances, you don't get inflation/deflation of the medium of exchange as the shock absorber,but you would rather have stable medium of exchange with a varying price of gold and varying FX rates between local currencies.
— Victor The Cleaner (@VictorCleaner) April 14, 2019
Do you see what is the position of the Eurosystem here? Account for gold at market price and target local consumer price inflation? Ready to switch over.
— Victor The Cleaner (@VictorCleaner) April 14, 2019
Here is how Blondie put it at @FOFOA999 's blog in 2012: You need to accept a varying gold price in order to have the Euro fulfil all three functions of money: medium of exchange (done),unit of acount (done),store of value (zero inflation, working on it, but still not there yet).
— Victor The Cleaner (@VictorCleaner) April 14, 2019
Or as Aristotle put it in the 2001/02 discussion at the USA Gold Forum: "I was positively shocked to find out that we absolutely need fiat money in order to set gold free." (from memory) Which says the same thing from the opposite point of view.
— Victor The Cleaner (@VictorCleaner) April 14, 2019
Finally, once you have arrived here, please read Barsky-Summers on "Gibson's paradox and the gold standard". It will be a huge eye-opener. Yes, it's *the* @LHSummers. Link to the article: https://t.co/cCZbtaHUEQ
— Victor The Cleaner (@VictorCleaner) April 14, 2019
Also see @FOFOA999 's "Once upon a time" https://t.co/APBBwScGMQ – It is interestig to note that the 1920s Fed contributed to the end of the international gold standard (most likely inadvertently).
— Victor The Cleaner (@VictorCleaner) April 14, 2019
After WW1 with reconstruction in Europe, the U.S. ran a huge trade surplus with Europe and in turn gained a lot of gold. As described above, this caused inflation. This was the first major occasion at which the Fed engaged in monetary policy in order to *fight* this inflation.
— Victor The Cleaner (@VictorCleaner) April 14, 2019
Of course, when you think about the other side of the Atlantic Ocean, this made the deflation in Europe worse and contrubuted to the end of international gold clearing with the 1922 Genoa Conference.
— Victor The Cleaner (@VictorCleaner) April 14, 2019
Now think about the Euro architecture. It is adapted to the international gold standard (account for gold at market price, use gold as number one reserve, in fact the only reserve named explicitly on their balance sheet !!).
— Victor The Cleaner (@VictorCleaner) April 14, 2019
But locally,they run an inflation targeting fiat currency,the Euro. In a situation such as right after WW1 with huge trade imbalances,this would *not* have created local inflation in the surplus country and there would not have been any political pressure to fight that inflation.
— Victor The Cleaner (@VictorCleaner) April 14, 2019
Instead, the local central bank can manage their local currency as they see fit, but the gold price in local currency declines. The gold price in the local currency of the deficit country, in contract, increases. No harm in the deficit country from deflation in local currency.
— Victor The Cleaner (@VictorCleaner) April 14, 2019
Do you see that the architecture of the Eurosystem is not only ready for, but actually favours this international monetary system: international clearing in gold, but local fiat currencies. It's even way superior to the (historically grown) pre-1922 arrangement.
— Victor The Cleaner (@VictorCleaner) April 14, 2019
Victor The Cleaner 