Baranzini M.* and Cencini A. (2001). Introduction, in S. Rossi, Money and Inflation. A New Macroeconomic Analysis, Cheltenham (UK) & Northampton (USA), Edward Elgar, pp.xix-xxvii.

*Full Professor in Economics. Dr. rer. pol. (Fribourg), MA and DPhil (Oxford), visiting professor at different universities (among which Harvard, Berkeley, MIT, Stanford, and Cambridge).



Today’s world monetary system derives directly from the system set up at Bretton Woods in 1944. Despite subsequent modifications of the gold-exchange standard – particularly the decision to suspend convertibility in 1971 – transactions between countries are still settled in dollars or in some other key currencies. No true system of international clearing exists, and no international standard has yet replaced the US dollar. In such a context, it is legitimate to ask how and if monetary homogeneity can be achieved internationally. This amounts to asking whether or not exchange rates may be defined as the relative prices of national currencies and determined through the adjustment of their supplies and demands. Hence, we see how closely related international and national problems are. Actually, if it were possible to determine the relative prices of goods and services through their direct exchange on the commodity market, it would seem quite natural to look for the determination of exchange rates on the foreign exchange market. But, is it really so? Is it indeed correct to consider exchange rates as relative prices? Do currencies have a price? To answer in the affirmative would amount to claiming that, at the international level, national currencies are transformed from means into objects of exchange. A strange claim indeed, since money is the numerical standard in which prices are expressed and since, as such, it cannot logically have a price. Yet, this rather simple ‘truth’ seems to have been disregarded or at least played down by mainstream economics. The result is an incapacity to understand reality and provide a valid solution to the instability hampering our system of international payments.

Contrary to what is assumed in the majority of models purporting to explain exchange rate fluctuations, the new quantum theory of monetary economics shows that exchange rates are not exposed to national monetary disorders, interest rates, or commercial and financial imbalances. The fact is that, with the unique exception of external debt servicing, international transactions imply reciprocal transactions between countries, a condition necessary and sufficient to guarantee equilibrium on the foreign exchange market. For example, let us consider the case in which a given country, A, is a net commercial importer with respect to the rest of the world, R. Two situations are possible. If A is a key currency country, its net imports are paid by crediting the banking system of the rest of the world, R, with a bank deposit in money A. The net inflow of goods and services is thus balanced by an equivalent outflow of claims on A’s bank deposits. The demand for money R (MR) in terms of money A (MA), due to A’s net commercial imports, is matched by an equivalent demand for money A in terms of money R, which leaves the exchange rate unaltered. If MA is not a key currency, country A pays its net imports in money R. This it can do either by drawing on its official reserves or by obtaining a loan from R. Since official reserves are actually used for other purposes (mainly to reassure foreign investors), it is through a loan that A gets the amount of MR necessary to pay for its commercial imports. Now, the loan is obtained by exporting an equivalent amount of financial claims. Because of the net credit obtained from RA incurs a debt, which is precisely the result of its net sale of financial claims. As in the previous case, the net purchase of real goods and services is balanced by a net sale of financial bonds, so that no variation in exchange rates occurs between MA and MR.

The payment of A’s net commercial and financial exports leads to the same result: the reciprocity of each transaction leaves exchange rates unaffected. This does not mean, however, that international payments are discharged in a purely logical way. The first case analysed above is clear evidence to the contrary. When paying for its net commercial imports, a key-currency country subjects its money to a process of duplication that leads to the creation of an international, speculative capital. First developed by Rueff (1963), this analysis of the so-called euro- (or xeno-) currencies is a key element in the explanation of exchange rate erratic fluctuations. Let us briefly summarise the main logical steps of the analysis. The payment by a reserve-currency country, A, of its net commercial imports implies the transfer to the exporting countries, R, of claims on A’s bank deposits. As shown by double-entry book-keeping, not a single unit of the income formed in A is transferred to R. The credit entered on the assets side of R’s banking system means that a part of A’s bank deposits are now owned by R. The deposits themselves, however, are still entirely present in A’s banking system. Hence, what R earns is the ownership of a deposit that remains available in A. Now, the fact is that the amount of money A entered on R’s banking system becomes autonomous with respect to its corresponding deposit in A. As stressed by Rueff, money A is subjected to a duplication since it is simultaneously available in A and abroad. Yet, while the bank deposits in A define A’s current output, the duplicate invested abroad has no real content whatsoever. By allowing the duplication to occur and the duplicate to become autonomous with respect to the initial bank deposits, the present structure of international payments allows the formation of a capital whose nature is essentially speculative. With no link to real production, this capital feeds a speculative market in which national currencies become objects of trade and their exchange rates are directly dependent upon supply and demand. As it happens with real goods, xeno-currencies are sold and purchased for their own sake; yet, contrary to what happens with real goods, their price is not related to their cost of production. Moreover, being mere duplicates, xeno-currencies do not contain any real production either. Despite this lack of objective relationship with national outputs, xeno-currencies are autonomous objects of trade on the foreign exchange market. Therefore, what makes up the speculative character of this market is not the kind of transaction it deals with (some of which are not speculative at all), but the fact that its very existence is due to the pathological process of duplication that transforms currencies from means into objects of payment. Speculation is the effect and not the cause of speculative capital, which is the direct consequence of currency duplications. As soon as currencies are transformed into objects of trade, their exchange rates vary according to their sales and purchases, and speculation arises with a view to making capital gains from these variations. It is not surprising, thus, that this kind of speculation becomes the main cause of exchange rate fluctuations, which, in turn, become the main incentive to speculation.

Is there no way of escaping this vicious circle? Can order eventually be established at the international level? Quantum monetary theory provides the foundation for a reform leading to this result. Foreshadowed by Keynes’s plan (Bretton Woods 1944), the reform proposed by Schmitt and his followers aims at transforming the present system of relative exchange rates into a system of absolute exchange rates. From a regime in which currencies are exchanged one against the other, we have to switch to a regime in which every currency is exchanged against itself, i.e. a system where each time money A is exchanged against money R, MR is immediately exchanged back against MA. Far from being odd, this principle is the only one that is consistent with the book-keeping nature of bank money and with its circular use. If explicitly applied to commercial and financial transactions between countries, it avoids duplication while it also guarantees exchange rate stability. Hence, the progress from disorder to order requires the creation of a structure allowing international transactions to take place through absolute exchanges. This may be done by following Keynes’s suggestion to let a ‘world bank’ issue a new, international currency and act both as a monetary intermediary and as a clearing house.

For example, let us consider the way the payment of country A’s net commercial imports would have to be carried out. The principle of reciprocal exchange being fundamental to ensure the circular use of money, it must be applied also by the new world bank, which, according to the rules of clearing, could carry out A’s payment only if A is the recipient of an equivalent payment from the rest of the world, R. In our example, the new world bank would carry out the payment of A’s net commercial purchase only when sells an equivalent amount of financial securities to R. The world currency issued by the new world bank would therefore be used simultaneously to convey real goods and services from R to A, and financial claims from A to R. The reciprocal exchange of commercial and financial assets would take place through the circular use of the new world currency, which, as any other bank money, would flow instantaneously back to its point of emission. By allowing the new world currency to be used in a closed circle, the new system would also guarantee exchange rates stability between MA and MR. Each national currency, in fact, would be exchanged against itself through the intermediary of the new world money. After being changed into the new world money and spent to pay for A’s commercial imports, money A would immediately recover its initial form, given the perfect reciprocity of the exchange transactions. As a result, a substitution would take place between the real goods and services exported by R and the financial securities exported by A. Through absolute exchange, goods and services sold by R would become the content of money A, while the financial securities exported by A would take the form of money R. The new system of international settlements would thus guarantee the real payment of each transaction through the circular use of a currency – the new world money – which would never be transformed into a final good. By replacing today’s regime of relative exchange rates with one of absolute exchange rates, it would also prevent the duplication of national currencies and ensure monetary stability.



Not surprisingly, another problem tackled by the new, quantum analysis of monetary economics is that of the European process of monetary unification. As is well known, according to the agreements subscribed by EU countries (with the notable exceptions of Great Britain and Denmark) their national currencies are bound to be definitively replaced by the euro by mid 2002. By spontaneously giving up their monetary sovereignty, EU countries aim to achieve monetary stability, a result that has so far always escaped them as a consequence of erratic exchange rate fluctuations (in this respect, let us simply recall the dramatic collapse of the European Monetary System in 1992). Now, while it is obvious that if a single currency replaces a number of national currencies it also suppresses their exchange rates, it has still to be proved (a) that the negative effects of abandoning monetary sovereignty do not exceed the advantages of suppressing exchange rates; and (b) that exchange rate stability cannot be achieved without forcing countries to give up their national currencies. Let us consider these two points in that order.

Strongly supported by Germany and its neighbouring countries, the Maastricht criteria of convergence do not seem to have a decisive impact on the process of monetary unification. The Treaty plays down the possible negative consequences of the important differences still existing among EU countries, and the persistent devaluation of the euro is seen more as the result of a speculative onslaught on the European currency than as a sign of its fragility. An important point that seems to have been largely overlooked, if not altogether discarded, is the fact that monetary unification will bring about totally free capital flows. This may sound strange, of course, since free capital flows have been considered as one key goal of European integration long before any agreement on monetary unification. Yet, careful analysis shows that capital is indeed free to circulate only within the monetary ‘space’ of a single currency. In other words, monetary sovereignty allows capital to move freely within national boundaries, but prevents it from ‘fleeing’ from one country to another. This astonishing result is a direct consequence of double-entry book-keeping. Issued by banks, money flows instantaneously back each time a payment is carried out. It thus follows that the entire amount of income created through production is necessarily deposited with the (national) banks that ‘monetise’ national outputs. Being derived from income, capital is therefore also a bank deposit. Now, it is impossible for the whole sum of bank deposits formed in a given country to be transferred to another country. Since scientific analysis is often hampered by misunderstandings, let us attempt to clarify the latter claim. Capital flight has always been considered as a transfer of capital between countries, since agents are obviously free to ask their banks to transfer their deposits abroad. Is it possible, then, to maintain – as we do – that not a single penny can leave the banking system from which it originates? The answer is based on the nature of bank money. If money income is defined as a bank deposit, it is logically impossible to retrieve it from of a banking system and transfer it to another. What happens, then, when an agent asks his bank to transfer his capital abroad? Contrary to what is implied by the word ‘transfer’, no capital leaves its country of origin. The account of our agent is indeed debited by his bank, B1, which gives him in exchange the ownership over a bank deposit formed in another country. His initial capital remains entirely deposited with bank B1 and is exchanged against a claim upon a foreign capital deposited abroad. This is also what happens in the case of capital flight. Contrary to what the expression suggests, no national capital is lost by the country whose residents transfer their capitals to another country. This is not to say, of course, that no loss is incurred, for example by the fiscal authorities. If residents are successful in surreptitiously concealing their capitals from their taxman, they obviously cause damage to their country’s domestic budget. However, their capitals do not leave the banking system in which they are deposited. Lost to the State, these capitals are still available within the national banking system.

The implications of this analysis of capital flight are far-reaching. In particular, it appears that national boundaries are an efficient barrier against capital movements only if they are based on monetary sovereignty. When monetary sovereignty is denied, a new monetary ‘space’ is created where capital can freely move from one region to another. European monetary union will bring about this result, with the undesired consequence that capitals will move massively from South to North, dramatically increasing the risk of unemployment in the South and social tension in the North. Put on the same footing as their northern competitors, southern firms will not be able to face the greater cost of their accumulated capitals, and might soon be forced to merge or shut down. Even such big firms as Fiat, Seat or Renault are likely to be taken over by their German competitors, with easily foreseeable consequences on unemployment. The fact is that, owing to important economic differences between national economies, in the last twenty years the process of capital accumulation has taken place at different costs within Europe. Now, the capital accumulated so far will bear fruit at different rates, according to the country in which it was formed. The decrease in the rate of profit that southern firms will incur after monetary unification will thus put them in jeopardy, forcing them to decrease their costs of production drastically.

In order to check whether such a process is already under way or is merely fictional, we need to verify whether the European monetary union adopted a single currency indeed.

Though surprising, the answer is negative, the reason being the lack of payment finality between euro area member countries. The Trans-European Automated Real-time Gross-settlement Express Transfer (TARGET) system is managed by the central banks of the member countries, and the payments between countries (between their residents) are made through their central banks. In the absence of final payments between the member countries, through the agency of the ECB, national currencies are not yet made homogeneous. This means that, de facto, the switching to the monetary union has been purely nominal. Member countries of the euro area did not replace their national currencies with a single currency, but simply changed their currency’s name. Hence, different euros are circulating within each country within the monetary union. Therefore, we note the existence of a nonsensical situation, as countries abandoned their monetary sovereignty without really losing it.

The case that can be made for maintaining of monetary sovereignty is further strengthened by the observation that exchange rates stability may be reached without replacing national currencies with a unique European currency. Our comment on Keynes’s plan of monetary reform finds fruitful application here. The same result that EU countries are aiming at through monetary unification can be reached in another way, averting the risk of any dramatic consequence on employment. To guarantee monetary stability it would be enough, in fact, to ask the European Central Bank (ECB) to use the euro money between member countries and to act as the European Clearing House. Indeed, Europe has the great opportunity to implement a system that would substantially enhance economic exchanges between its member countries, allowing each of them to use the monetary and fiscal policies best suited to insure economic convergence between them. The ECB already exists and it would be simple to organise it in such a way as to play the role Keynes envisaged for his International Clearing Union. The principles of clearing are well known, and the present system of gross settlements introduced nationally could be applied without difficulty in the context of TARGET (Trans-European Automated Real-time Gross-settlement Express Transfer system). Let us hope that reason will prevail, so that Europe can be saved a drastic increase in unemployment.



Another line of research developed by the new quantum analysis of monetary economics deals with the servicing of foreign debt by non-reserve-currency countries. The main conclusion drawn in this respect by the theory is that indebted countries cannot help paying twice the amount of net interest due on their foreign debt. This is, admittedly, a rather unconventional assertion, and it cannot be explained in a few lines. Let us simply note here that the charge of interest payment would never double in a world in which national currencies were rendered homogeneous through a system akin to Keynes’s Plan for the Establishment of an International Clearing Union. The lack of a system of international payments conforming to the double-entry nature of bank money forces less developed countries (LDCs) to purchase the means of their external payments. The purchase of the mere means of payment has a net positive cost only when payments are unilateral, which is precisely the case with interest payments. By definition, interest payments are transfers that issue in a double charge since indebted countries have to face both a real and a monetary payment. In fact, they first transfer part of their national output to creditor countries. Additionally, they must give up an equivalent part of their reserves. Now, while the ‘real’ payment is perfectly legitimate (creditors being entitled to part of the income generated by their initial investment), the second payment is entirely superfetatory.

What is wrong with the present system of international payments is not the fact that indebted countries pay their creditors with a measure of net commercial exports, but the fact that they must also cover the cost generated by the unilateral transfer of a positive sum of national income. Being forced to pay with a foreign key currency, LDCs avoid the loss affecting their national income only by being subjected to an equivalent decrease of their official reserves or through an increase of their foreign debt. On the whole, the payment of x units of interest costs them 2x units, twice the amount due to (and obtained by) their creditors. Indeed, the second payment is not made in favour of the creditors, but of their countries, considered as a whole. This means that the payment of interest between countries can be properly understood only at a macroeconomic level. From a microeconomic point of view, the payment of interest defines a transfer of income from debtors to creditors. This is precisely what happens when interest is paid within a given country. Things change radically when the payments are across borders. The transfer of income between debtors and creditors can no longer take place without a monetary conversion of domestic into foreign currencies. In fact, this conversion is necessary to transform the payment of a domestic income into the payment of an equivalent amount of a foreign income. Put simply, the indebted country whose residents have to pay interests to foreign creditors gives up an equivalent amount of foreign exchange coming from its net commercial exports. Now, although it is true that part of the income generated within the indebted country, A, by the initial foreign investment is due to the creditor countries, R, it would be wrong to claim that A must pay R by giving away not only a part of its national output but also an equivalent amount of foreign currency. Having transferred to R a portion of its external gains derived from its exports, A should be quit. If this is not the case, it is because today’s system of international payments does not allow the cost-free conversion of the payment made by the indebted residents of A into that carried out by their country. It is at the macroeconomic level that things go wrong. Indebted residents pay once, as required, and their country is forced to pay a second time because the unilateral transfer of interest creates a ‘monetary hole’ in A’s economy. The consequence of A’s unilateral transfer in favour of Ris that an equivalent part of A’s commercial exports is given free to R. Hence, the payment of interest by A’s indebted residents entails a non-payment of A’s commercial exports that must be matched by an equivalent decrease in A’s official reserves. This second charge of external debt servicing immediately adds itself to the real payment of interest – the free transfer to R of part of A’s national output – thus doubling the total charge supported by country A and its residents. Once again, while the real payment prevents exports from increasing A’s official reserves, the monetary payment of interest requires a second measure of exports that are not paid by R, and which causes a monetary deficit. This deficit is then covered through a decrease in A’s official reserves.

If the indebted residents’ payment were the only payment required by foreign debt servicing, country Awould act as a simple intermediary. It would receive the domestic income spent by its residents and transfer an equivalent foreign income to foreign creditors. The conversion of domestic money into foreign currency would take place at zero cost, and the only charge of interest payments would be the amount of commercial exports necessary to pay country R’s creditors. Yet, barring a reform implemented by each single country, interest payments would imply a unique charge for A only if a system of international clearing allowed countries to benefit from a free conversion of their domestic currencies. In other words, the payment of interest would be normal if it were inserted into a system of reciprocal transactions between countries. As already suggested by Keynes in 1944, such a system is not intended to restrict transactions. On the contrary, it aims to provide a monetary structure allowing international payments to be carried out without causing any monetary disturbance, that is, without provoking exchange rates fluctuations and without forcing indebted countries to pay twice the interest accruing on their foreign debt. The new, quantum monetary theory briefly presented here provides a detailed analysis of how the system of international payments should be structured in order to achieve this result. More important still, it offers a practical solution allowing each single country to protect itself from the second charge of external debt servicing. If adopted, this solution would reduce foreign debt servicing to a single payment, which would bring to the indebted countries a gain equivalent to the interest paid to their creditors. For example, in 1998, Mexico would have saved 12,589 millions dollars, Argentina 8,976 , and Brazil 12,465. Each of those countries would thus have kept a disposable sum that has actually been lost in the ‘black hole’ of external debt servicing. The unjustified decrease in official reserves suffered by indebted countries under the present ‘non-system’ of international payments is equivalent to their interest payments, and measures the loss incurred by their Treasuries. The reform proposed by Bernard Schmitt and his School would prevent this from happening ever again.