B. Clearing in Interlocal Exchange

Clearing is particularly appropriate for interlocal transactions, since costs of transporting money from one locale to another are likely to be heavy. Bills of exchange on each town (i.e., I.O.U.’s owed by each town) can be reciprocally canceled. Suppose that there are two traders, A and B, in Detroit, and two in Rochester, C and D. A sells C a refrigerator for 200 gold grams, and D sells B a TV set for 200 grams. The two debts can be cleared, and no money need be shipped from one place to the other. On the other hand, D’s sale of a TV set may total 120 grams. Suppose for a moment that these are the only traders in the two communities. Then 80 grams will have to be shipped from Rochester to Detroit. In the latter case, the citizens of Detroit have, on net balance, decided to add to their cash holdings, while the Rochesterites have decided to diminish their cash holdings.

Economists have often described interlocal trade in terms of “gold export points” and “gold import points.” The use of such expressions assumes, however, that even though two localities both use gold money, it makes sense to talk of an “exchange rate” of the money of one locality for that of another. This exchange rate is set between the margins fixed by the cost of transporting money—the “gold import” and “gold export” points. This does not hold true on the free market, however. On such a market, all coins and bullion are expressed in terms of weight of gold, and it makes no sense whatever to speak of an “exchange rate” of the money of one place for the same money in another. How can there be an “exchange rate” of an ounce of gold for an ounce of gold? There will be no legal tender or other laws to separate the value of the coins of one area from those of another. Therefore, there may be slight variations in the PPM in each locale, within the limits of the cost of transporting gold, but there could never be deviations from par in interlocal “exchange rates.” For there are no exchange rates on the free market, except for two or more coexisting money commodities.