I realize that this topic sounds utterly boring. But if you
think that gold has a role to play in a new international monetary and
financial system (IMFS) this topic should be of the utmost importance to you.
There is more than one theory about international trade. If one particular
theory is correct then gold
better not give up its day job just yet because it’s not going to
get the trade settlement gig in a new IMFS.
A concept called “balance of trade” or “national balance of
trade” is central to this discussion. This term appears to have been coined
around 1615 and it started a food fight among economic thinkers that's still in full swing. There are several competing theories about the drivers of trade and the appropriate
objectives of international trade.
Any attempt to examine this topic is complicated by the
intervention of monarchs or governments and their bureaucracies down through the
years. However, I think we can distil a few key themes from the debates about
this subject over the centuries. The classical economists believed that free
trade served human welfare and that imbalances are naturally self-correcting. The way this was done was through the prices+-specie-flow mechanism and refraining from intervention in free trade.[1]
(The word “specie” implies gold and/or silver to many
people. This view is erroneous. Specie should be read simply as ‘money’ or
‘capital’. With money as a subset of capital provided the money is accepted in exchange for capital goods. [2])
Another perspective (labelled “mercantilism”) holds that the
national balance of trade should be viewed as the sum total of all of the merchants
cash tills in the country. The false implication this conveys is that the mercantilists
sole aim was to obtain a cash surplus
(or profit like a merchant) from trade. The actual aim of many of the mercantilists was to obtain a
surplus of imports over exports. A money surplus represented a future goods surplus. Some of the mercantilists proposed controlling both
exports and imports in order to ensure that there were enough goods available within the borders of their nation to enrich the lives of everyone who lived there.
On at least one issue the classical economists and the
mercantilists were on the same page – viewing international trade as an indirect
exchange of goods-for-goods mediated by money. Goods that contributed to human
welfare and wealth (in its broadest sense). Money (bullion for “the
bullionists”) stored the surplus purchasing power. The real issue between these two
camps was balanced trade versus creating a deliberate imbalance in your own
favour which the classical economists viewed as self-defeating.
In recent times the view has been propounded that a country
running a trade deficit is unproductive and countries running surpluses are
productive. Surplus producers are lauded and the citizens of countries with
trade deficits are derided as net-consumers. The implications are that deficit
= lazy and surplus = industrious. But kindly note: Countries who run trade
surpluses must export capital
and countries with deficits must import
capital – "balance sheets must balance" as the Minskyite economist Michael Pettis is fond of saying.
For a long time I viewed this solely as
a win-lose deal. Trade deficit countries are “forced to sell off the farm” to
the surplus countries. But eventually I realized that there are a few problems
with this lazy vs industrious and winner vs loser perspective which I’ll briefly
summarize for you. The biggest problem is the existence of a theory that the capital
flows occur first and lead to the trade deficits. If you subscribe to this
theory you could use it to support the claim that the deficit countries like
the USA are in a sense the "victims" of the surplus countries excessive saving
and lack of domestic consumption.
Secondly citizens of a country running a trade deficit can
be highly productive and industrious but obtain prices for their products which
are too low to generate sufficient revenue to pay for their imports. (I suppose
the rejoinder might be that these people in deficit-land were stupid in their decisions about what to
produce and it serves them right. Personally I think the return of serve on that stroke might be a sizzler.)
Thirdly a country could have a surplus of capital absorbing
investment opportunities for which there is insufficient capital available
locally. If this was the case then it could make sense to adopt policies that encourage a
surplus of capital imports rather than trying to "save" up enough money to finance them domestically. Figuratively speaking that “deficit” country could
run an “export” surplus of in-bound foreign direct investments (FDI).
Now we come to an
important issue that needs to be addressed by those of us who believe that a
gold-based IMFS is in the pipeline. In the capital flow trade model I just outlined there is no
need for so much as a single gram of gold to flow in order to settle the trade
“imbalance” implied by running a current account deficit (CAD). There is NO imbalance
for a flow of gold to balance.
[1] I changed the text from "prices+costs" to this - ‘prices+-specie-flow mechanism’ - to reflect
the fact it’s influenced by more factors than prices and costs alone and to give this mechanism my version of its formal title which is the "price-specie-flow mechanism".
[2] Hat tip to 'DP'. The way I expressed it originally implied that money and capital are two different things.
