Professor Frisch on Discrimination and Multilateral Trade

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For practical reasons it will probably be useful to carry the clearing through in compensation units. In banks and in other firms, this unit will be handled exactly as any other kind of foreign exchange. Between the central banks of the countries in question an agreement may be made to the effect that the central banks can draw on each other in compensation units, and thus put the necessary funds at the disposal of the commercial banks of the country, and the public. This credit between the countries will be only of a temporary character because the credit relations will be extinguished within the prescribed limits of tolerance as soon as the trade is effectuated. For instance if, as a consequence of compensatory trade, the central bank of country A should be credited for an amount in compensation units with the central bank of country B, and this bank in turn should be credited for a corresponding amount with the central bank of country C, which finally should be credited for a similar amount with the central bank of country A, then all these credits would, of course, be extinguished simultaneously -within the given tolerated deviation -if the central bank of country A draws on the central bank of country B and sends this draft to the central bank of country C. If the system shall function according to its purpose, it is necessary that the licenses which are granted are also actually used. Experience will show if this can be assumed to take place by itself with the degree of approximation wanted, or if special measures will have to be taken to assure it.