How the National Clearing Fund Works

The maximisation of economic benefits from world trade can be facilitated, but not automatically assured, by any purely technical system, whether bilaterl or multilateral.

How would Pool Clearing increase such benefits?

Negative Balances

Pool Clearing allows every country 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 can then receive any payment from international economic exchange such as:
  • payments for foreign goods and services*,
  • interest, dividend and amortisation payments on old and new foreign debts, etc.

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

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. However, no country would wish to give the world an unlimited overdraft on its own resources*.

How should these overdraft facilities be 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 only be paid after the importers have imported and paid into the Fund.

2. Each country might be given a maximum limit for its Clearing Fund [Demand-side]

After that limit is reached, the Clearing Fund of the importing country stops processing transactions from the overdrawn Clearing Fund of the exporting country. That overdrawn fund <!– – they –> would refuse to further pay their own exporters*.

These 2 methods stop (or ration) deliveries to the overdrawn country. But their effect on the rest of the world is different.

Let us assume that 6 countries agree to have 5 of them to have a joint 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.