Study Course in Social Credit

By J.M.Hattersley

Lesson IX – Foreign Trade

Once we have outlined the proposals we have made on the subject of financial reform, as we have been doing in the past two lessons, the objection that is most usually heard runs something along these lines: “Granted that the reforms that you suggest would do a great deal to improve the economic strength and welfare of our country, are they not likely to be impossible to put into effect because of the problems of foreign exchange?'

This is a legitimate question, because in fact it is precisely the problems of foreign exchange that at the present time do sharply restrict monetary policies in many countries of the world. Canadian industries in recent years, the automobile industry in particular, have for example been badly harmed by an exchange rate that has risen from around 63 cents to the U.S. Dollar, to as much as $1.05, so making our manufactures uncompetitive, at the same time as U.S. Dollars were being used to buy up interests in the Alberta oil sands.

On the other hand, the whole question of foreign exchange and international trade is not an impossible one to answer. The fundamental problems of the source of the money supply, and the effect of the flow of capital funds, apply here also. In fact, because of the scale on which foreign exchange transactions take place, it is often rather easier to understand what is going on in the international monetary field, because these things happen on a large scale and obvious way, than to spotlight some of the hidden defects of our domestic monetary arrangements.

The Reason for Trade.

The reasons for trade between nations are really not essentially different from those we gave for trade between individuals examined in Lesson II. For reasons of climate, geography, location of resources etc., certain nations have surpluses of goods of one kind, but cannot produce sufficient goods for themselves of some other kind. The simplest sort of trade, therefore, is the exchange of surplus commodities between nations for the benefit of each. Canada grows more wheat than her people can consume – Japan is short of agricultural land, but has well developed light industry, There is obvious scope here for trading the food and raw materials of Canada for the finished products of Japan, and both nations will benefit.

Trade as Barter.

From the earliest times, the merchants of the world have engaged in trade that has in essence been little different from direct barter. Many old tales tell of how merchant venturers fitted out ships with wares for export, sailed to distant lands, and came home to sell those foreign wares at a fabulous profit – the plot is the same, whether the hero is Dick Whittington or Sinbad the Sailor.

Trade such as this could be carried on without the use of any foreign money at all. Merchant A, coming from country A (which uses dollars) might spend $1,000 in fitting out a vessel to trade with country B (which used pounds sterling). He could then sail to Country B, and sells his wares for, say, one thousand pounds sterling in local money. After spending this money in restocking his ship, he might return home, sell what he bought in B for $4,000, and retire with a profit of $3,000 from his total enterprise. In essence, what has taken place is a profitable exchange of goods for goods, even though, as we saw in Lesson II, it is possible to attach a price tag even on such a barter exchange.

In this last illustration, for instance, we could summarize the transactions as follows, even though not a dollar of money of Country A left that country, and not a pound of the money of Country B left Country B.

COUNTRY A
Merchandise Exports f.o.b.¹ Country A          $1,000
“Invisible” exports (shipping services) $3,000
                         TOTAL EXPORTS     $4,000 Imports of Merchandise c.i.f² $4,000
                         TOTAL IMPORTS     $4,000

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COUNTRY B
Imports of Merchandise f.o.b.             £1,000
Exports of Merchandise c.i.f               £1,000

Exchange Rate (Exports A: Exports B)           $4=£1

Money in International Trade:

Barter is, however, a difficult way of carrying on the process of exchange, even when, as illustrated above, it is eased by the use of local currency. Internationally, therefore, as nationally, there has been pressure to replace barter with some form of money. For various reasons though, this development of a form of international money has not progressed to such a high degree as has been the case of domestic currencies that we have already studied.

One most important reason for this is that there is no issuing authority comparable to the modern state able to issue a generally accepted international currency. Consequently there is no state created “fiat money” in international trade.³ The fundamental international money unit is therefore money of intrinsic value – generally speaking gold – supplemented by the usual techniques of Banking which, by use of paper promises, make a limited supply of gold the basis for a much greater supply of credit.

The Gold Standard.

The nearest approach the world has seen to an international currency acceptable in all parts of the world was in the heyday of the “gold standard” in the late nineteenth and early twentieth centuries. In its theoretically perfect form, a world gold standard meant that the money of every nation was valued as being worth the same amount as a particular quantity of gold. If nations bought and sold to each other, and it happened that one nation exported more than it imported, there would be a flow of gold from other nations in its direction, so increasing its national money supply. Such an increase would cause a degree of inflation and drive up its prices. Higher prices would make its exports less competitive, so encouraging other nations to export to it, bringing back a balance. By the same mechanism, an “adverse” balance of trade, with imports being greater than exports, would cause an outflow of gold, so causing deflation and a fall in prices.

This may have been fine in theory, but it was a failure in practice, because in practice the gold did not always flow the way it was expected to. The theory was that gold should flow from one nation to another in order to settle international indebtedness. In practice, speculators could import and export gold, so causing a deliberate unsettlement of international exchange, making a profit on the price fluctuations so caused. In his book “A Fraudulent Standard”⁴ Arthur Kitson cites a case where, some time before World War I, an American syndicate withdrew the sum of eleven million pounds in gold from the Bank of England, and shipped it to New York. Withdrawal of this amount of gold meant, of course, that a considerably larger amount of credit built upon the backing of this gold had to be canceled. The result was a fall in the United Kingdom Stock market in the price of 325 representative securities of $115.5 millions, and corresponding gains in prices in New York. The speculators, playing on two tables at once in London and New York, could not fail to make their profit.

The Gold Exchange Standard:

The economic shocks of World War I and of the 1929 Stock Market crash and the Great Depression which followed effectively put an end to the international Gold Standard. Nations simply were not prepared to let their countries stay in a condition of depression for the sake of following the rules that the Gold Standard laid down. A more flexible system developed, where international settlements could be made either in gold or in some currency exchangeable for gold on demand. The Bretton Woods agreement, setting up the International Monetary Fund, was based on this concept, with the U.S. Dollar being the most popular convertible currency used for international settlements. One result of this was to create a high demand for U.S. Dollars, so as to give them far more buying power than the currencies of most “third world” countries. A second result of this was to place an enormous strain on the U.S. Dollar itself, pegged to be redeemable in gold at a price of $35.00 per ounce. That rate in an expanding world economy simply could not be maintained, and in August 1971, the Nixon administration in the United States abandoned convertibility, since which time the price of gold in U.S. Dollars has risen twentyfold.

The U.S. Dollar continued, however, to be used as the primary settlement money in international exchanges, particularly because it was the currency in which the greatest part of the world's oil was priced. For many third world countries, loans for “development projects” carried out by U.S. Firms imposed debt obligations on such countries beyond any hopes of repayment, giving effective control of their economies to United States interests through the International Monetary Fund, and miring such countries in unnecessary poverty.⁵

A second consequence of the abandonment of the discipline of the Gold Standard was the replacement of employment in the United States from manufacturing industries to unproductive (in real terms) banking and financial operations. The high exchange rate of the dollar meant that a whole raft of articles, automobiles in particular, but also electronics, toys and appliances, could be imported into the U.S. much more cheaply than could be manufactured at home. Countries such as China also maintained their employment and development by buying U.S. Debt in quantity – so keeping their exchange rate low, and enabling the U.S. to use deficit financing to pay for its extremely expensive military missions abroad. Currently, this honeymoon period appears to be coming to an end, and the U.S. is paying dearly in deficits and deflation for a period in which its financial system was allowed to run wild.

A World Currency

Because of the acknowledged weaknesses of international settlement arrangements based on the gold standard or extensions of it, suggestions have been made that some supra-national authority should issue a “world currency” of fiat money, with which international settlements could be arranged. This could certainly make sure that there was a sufficient quantity of this money to finance international trade, and also correct the gross distortions in exchange rates that result from the use of a national currency, the U.S. Dollar, as the vehicle for international settlements. But there is no guarantee that such a currency would not still be used by international speculators to continue to distort the world's economies, at the expense of the less developed nations of the world.

Again, Arthur Kitson puts the point very well:⁶
“The effects of a universal currency would be, in the absence of tariffs, to reduce the working classes of all countries to one very low standard of living. The masses of mankind would be engaged in a life and death struggle for the possession of money and for the control of foreign markets, and the nation who could produce goods at the cheapest rate (in other words, the nation whose operatives could be induced to live at the lowest stage of existence compatible with their ability to produce goods) would become the most successful …

“Far from adopting a universal world currency, the most beneficial policy would be for each nation to have its own national paper currency – a currency that has no circulating power beyond the boundaries of the nation issuing it. Such a currency forms a natural protection for its trade and industries. It prevents the cut-throat competition which a world currency permits, and it renders international trade a system of barter – that is, an exchange of goods for goods, which is the natural and rightful form of trade.”

Two major arguments therefore can be advanced against the “world currency” approach:

• It prevents national governments administering monetary policy in the interests of the people they govern, and
• Any currency area which is so large that it is physically difficult to move goods within it at short notice, compared with the ease with which money can be transferred, will be the prey of speculators manipulating prices through rapid, long distance, movements of currency.

Protection or Free Trade?

An offshoot of the same class of thinking that promotes a world currency is the concept of “Free Trade” and lowering tariff barriers as a way of securing world prosperity. This, of course, is fallacious.

In earlier lessons, we have already contemplated the “gap” between purchasing power and prices caused by the increasing use of machinery in production. One way of seeing that there are funds to close this gap and secure full employment at home is to pass the problem on to another country by securing a “favourable balance of trade”, where exports exceed imports in value, and one's own country becomes the “workshop of the world” to which other countries are indebted, as Great Britain was in the 19th century, and China has become today. Since our own dollars are only of use to buy goods in our own country, this means that we secure our own prosperity by piling overseas debt on less developed nations – something very obvious in the disastrous state of public finances in many third world countries, where populations may be starving while “free trade” dictates that the food they grow be exported to other countries who have the funds to pay for it at higher world market prices.

 

An Effective System

Let us summarize what we have learned so far.

International exchange is primarily a means of barter of goods for goods between countries. As such, it can be carried out without the use of any monetary unit whatsoever.

However, if gold is used as a means of settlement of international indebtedness, it gives the advantage of fixed and certain exchange rates, and an easily worked international accounting system. Disadvantages are loss of national sovereignty, ease of speculation, and scarcity of the international monetary medium, which from time to time causes foreign exchange crises. Another disadvantage is the unrealistic levels of international exchange rates, caused by a particular demand for “hard” currencies, exchangeable into gold. These disadvantages are not wholly eliminated by the use of some kind of international “fiat” money, which also imposes considerable limitations on national sovereignty.

So let us now see if we can lay down specifications for a practical world foreign exchange system which would not have these defects:

• It should have stable exchange rates – otherwise the use of money in international exchange is impossible.
• Exchange rates should be realistic – that is, they should adequately reflect the buying power of each local currency in terms of a standardized form of wealth, e.g human labour of a particular grade of skill.
• It should not adversely affect domestic monetary policy.
• There should be no restraint of trade caused by shortage of the monetary unit.

These specifications could be comparatively easily filled by an international monetary arrangement along the following lines:

• The value of every national currency in terms of every other would initially be fixed in terms of the labour buying power of each, possibly adjusted for the quality of the labour, the wealth of that country's natural resources, and its degree of industrial development.
• Up to specified limits, the treasuries or Central Banks of each nation would be willing to accept the currencies of other nations into their reserve funds, paying out their own national money in exchange.

 

How it Would Work

Such a system could work with extreme simplicity. Exporter A, in country A, might see a good sales opportunity in Country B, having in mind the price level in B measured by the exchange rate between the countries. Because this exchange rate was fixed in terms of labour cost, the reason for this would have to be that he had some superior economic or industrial advantage by which he could sell more cheaply, not that he was underselling by the use of “cheap labour”.

Merchant A would be paid by the buyer of his product in Country B in the currency of Country B. This, of course, would be useless to him for spending in his own country, so he would take it to his own central bank, who would pay him the fixed rate for it, and put it into its own exchange reserves.

Merchants in country B would similarly be paid for exporting to country A, and in turn, the central bank of B would begin to accumulate reserves of “A” currency. From time to time these central banks would meet and exchange and cancel these foreign exchange reserves. In cases of trade between a number of nations, those reserves might conveniently pass through several banks in several different countries before finally coming to the cancellation point.

What would happen if one country started “living off its neighbours”, by importing more than it exported? In the central banks of other nations, more and more stocks of its currency would be held. Such nations would then have to make a decision. Either they would have to go to the country that was exporting too little, and spend the money they had on desirable imports – or it would remain useless paper in their hands. The pressure that countries now have, to export more than they import, and accumulate gold or hard currency reserves, would be counteracted by a system that gave, in exchange for a “favourable balance of trade” no more than a pile of paper currency, which gave the right to go to the debtor nation and buy its products at prices which, by the fixed exchange rate policy, would be guaranteed to be realistic in terms of its own.

How would international investment be handled under such a system? Suppose that country B was undeveloped, and that investors in country A wanted to supply it with factories, business organization and so on. The answer is very simple – and very interesting. If the investment money were spent buying equipment in country A, the overall effect would be that investors in country A were paying currency of country A to producers in their own country to provide goods and services that they would deliver to country B without immediate payment. In due course, when the new facilities were installed in B, profits would come to the country A investors, taking the form either of B currency, or goods produced in B ready for sale in the markets of A. If, however, the investment money was used for “buying up” the assets of country B – its natural resources, its real estate, its business organizations and so on – the result would be a heavy accumulation of the funds of country A in the hands of the central bank of B which, if the authorities in B are wise, they will be able to use to obtain comparable investment control of country A. What would be avoided is a situation which nowadays is the curse of the underdeveloped world: an obligation to pay back in A's currency debts which currently B can only liquidate by exporting to A food and other materials which would better be used to provide an adequate standard of living back home in country B.⁷

How to get there:

International agreements relating to tariffs and trade, and the sheer difficulty of reorganizing a world exchange system that is deeply established and highly profitable to financiers, mean that it is bound to take time to put a scheme such as the one suggested above into effect. However, the following first steps could easily be taken, and have in fact been already discussed by some nations at the international level.
1.         International currency exchange agreements. Any two central banks of any two countries can very easily agree to exchange quantities of each other's currencies at an agreed exchange rate. This provides reserves to finance trade between them, and neatly avoids all problems between the two caused by a scarcity of gold or “hard” currency. It can be conducted on such a scale as to be beyond the powers of even the best endowed speculators to disturb.
2.          A selective tariff/subsidy policy. This could be a means to bring the price level of Canadian products down to the wage level of “low wage” countries so that they do not compete unfairly with Canadian products. A special tariff, or “anti-dumping duty” is placed on all imports from the low wage country, to raise the price of these on the Canadian market to what it would have been had Canadian labour been employed. The proceeds of this tariff are used to reduce the price of Canadian exports to the country concerned, to bring such prices down to the earning level of labour in that country. In effect, what this policy effects is an altered exchange rate, expressing currencies in terms of local wage rates, rather the supply and demand for gold and hard currency. It could well be the key to opening markets for Canadian products in areas now closed to our exports because of foreign exchange difficulties.

* * * * * * * * * * *

FOR FURTHER READING:

Rev. Denis Fahey. “Money Manipulation and the Social Order” especially Chapter V “International Trade and the Gold Standard”
C. M. Hattersley “The Community's Credit” especially Chapter 9 “The International Aspect.”
Statutes of Canada: “The Bretton Woods Agreement Act”, “Currency, Mint and Exchange Fund Act”, “Bank of Canada Act”.

 

 

QUESTIONS:

1. Is there any fundamental difference in nature in the problems of exchange between nations and those of exchange between individuals?

2. What are the reasons for engaging in international trade?
3.Barter is the natural and rightful form of international trade.” Do you agree? In what ways can money be of use in such trade?
4. What are the advantages and disadvantages of the gold standard. Why has it largely been abandoned in recent years?
5. What is the difference between the “gold standard” and the “gold exchange standard”?
6. What are the arguments against establishing a single world currency?
7. Can the area covered by a single currency be too large? What disadvantages arise in such a case?
8. What different results occur when foreign investment is (I) spent within the investing country, and (ii) within the country in which the investment takes place, for the purchase of its assets and   resources. Are the results the same (I) if exchange rates are fixed, or (ii) allowed to float?
9. How far can “currency exchange agreements” between central banks be of use in stabilizing international trade transactions?

 

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