The Effects of Pool Clearing

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.

The Pool’s cash 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 lets each country 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 trade 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 most easily and freely:

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

If Argentina were tied down to spending all her British export revenue on British goods, she might experience difficulties finding suitable goods from Britain.

• But if she were entirely free to spend her money wherever she likes, then any failure to spend on imports can only be a failure of effective demand in Argentina.

Such failures can occur.

Under the Gold Standard (or any other international monetary system based on free convertibility), they led to the 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.

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.