How to Restore the Gold Standard through Clearing FundsDecember 14, 2020
Our proposed Multilateral Clearing system , derived from EF Schumacher and Adam Smith, can prevent currency attack and commodity speculation since:
- forward contracts will not be transferrable
- private currency trading will not be allowed
The job of providing liquidity and transferring working capital to the producers and exporters will be done instead by clearing funds.
But how will the system work for overseas investments?
If a Japanese investor wants to invest his JPY 1b in Vietnam using the current financial system, he will convert it to USD which the Vietnamese banks will convert into VND. This would make the investment subject to USD fluctuation from speculators and currency attack. This also requires two conversions which will increase its cost.
To solve this, our clearing system will let the investor deposit his JPY 1b into the Japanese clearing fund. Let us assume that he allocates:
- half of it for working capital
- half of this is for Vietnamese wages which must be in VND
- the other half is for working capital for materials whether procured locally or from overseas
- half of it for fixed capital
- half of this is for Vietnamese land and local construction costs which must be in VND
- the other half or JPY 250m will be for Japanese equipment and construction costs from Japanese materials
How can the JPY 750m be converted to VND 160b without swapping currencies?
- The JPY 750m will be deposited into the Japanese clearing fund as security to borrow Japanese central bank gold at the pool rate. This assumes that the central banks know the actual money supply and have pegged their rates accordingly. The central bank gold is not a representation of gold but really a representation of grains
- The gold will be transferred to the account of the Vietnamese central bank
- It will serve as central bank guarantee to invite the VND money market* to deposit 160b VND into the Vietnamese Clearing Fund under the investor’s name
- The investor can then use the VND to rent government land, materials, and pay wages
*The main attraction will be the fact that their investment is guaranteed by the entire pool and not subject to inflation
- The Vietnamese investee will then export the produce, most of which will be bought by Japanese importers who will pay into the Clearing Fund
- This will trigger the inert JPY 750m to return to the investor over time, as well as the VND owed to the VND money market
- After the investments have been recovered, the gold tranferred back to the Japanese central bank
If the investment fails, then other foreign investors can add more gold to overhaul it to make it work. Alternately, the investment can be wound down and the inert JPY can be used to export Japanese products to Vietnamese investors to satisfy their claim with even the possibility of material gain, despite a monetary loss.
This clearing system is different from the current commercial system as it creates a win-win situation through the cooperation of the central banks, investors, producers, exporters, and importers. The commercial system, on the other hand, fosters no such cooperation. This is why banks with failed investments get stuck with non-performing loans which then cause financial crises.