Network Clearing

Clearing debts in a network of parties that owe each other is an effective tool that was already in use at trade fairs in the middle ages. It helps members of a network to use much less cash to settle their obligations, compared to one-on-one transactions.

This is a similar concept to groups of people sharing ongoing costs without each having to pay their share after each transaction. There are banking apps to facilitate that. An even simpler example is friends buying each other rounds of beers in a pub.

At the other end of the spectrum, we find large banks, and even nations, settling their debt against each other multilaterally. Banks and financial institutions have been doing this for centuries.

From 1950 to 1958, the European Payments Union (EPU) allowed 18 European countries with limited finances after the war, to trade more easily among each other. Each month, the EPU calculated a net credit or debit balance for each country in relation to all the other countries in the Union, and settlement was carried out. This process helped with the revitalisation of the European economy, after which it was replaced by the European Monetary Agreement (EMA). It was a version of the International Clearing Union that Keynes unsuccessfully proposed at Bretton Woods in 1944.

Network clearing has also been successfully used within an individual country, as we describe in our article about multilateral obligation set-off, a specific type of clearing.

These examples demonstrate that network clearing can be a very effective tool to save cash, and could be especially useful for local business networks.