A “trade deficit” sounds like a national failure, a worrying shortfall in our country’s accounts. Yet imagine for a moment that, instead of a mysterious missing sum of dollars or pounds, what flew out of our borders were actual bars of gold. No one would bat an eye at gold exports even if they exceeded gold imports because we would see them for what they are: a standard and uncontroversial flow of a traded commodity across borders.
In days of yore, this is precisely what happened. When Britain imported more than it exported, it shipped gold abroad; when it exported more, it accumulated gold reserves. Statisticians invented an artificial distinction between monetary gold (the portion held by central banks as official reserves) and non-monetary gold (jewellery, industry, collectables) to create the impression of a ‘balance of payments’ gap. This artificial split allowed statisticians to show “trade in goods” on one side and “reserve movements” on the other.
That split made sense only as long as every ounce of gold exported had to be met by an ounce of gold imported or else the central bank would be forced to defend the conversion peg by buying or selling bullion. In that world, an actual “deficit” in gold meant the vault was running empty, and the country might default on their fixed rate promise.
But we abandoned that system decades ago. Once we moved to floating exchange rates, currencies stopped being promises to deliver gold. They became valuable products in their own right. The pound isn’t a claim on anything else; it’s simply what we agree to use to pay taxes, wages, and invoices. And like gold, it is freely bought, sold, and held purely for its own sake.
Yet our accounting conventions haven’t fully caught up. We still treat foreign holdings of sterling reserves and bank deposits as a “financial account” balancing item, separate from “trade” in goods and services, even though, in substance, they are traded goods. If a wine merchant in London wants Chilean wine and pays the Chilean producer in sterling bank deposits, those deposits aren’t mysterious IOUs; they’re the export itself. They settle the wine invoice with the same finality and with the same future liability as gold sovereigns.
Seen this way, “sterling exports” are no more worrying than “gold exports.” They show that people abroad are choosing to hold pounds, just as they might choose to hold gold. They might want to save pounds, invest them, or use them to buy things in the future. When they no longer want them, they spend or exchange them. These flows rise and fall over time, but they reflect ongoing, voluntary transactions, not a problem or a shortfall.
If we exorcise the ghost of gold convertibility from our language and call currencies what they truly are—“financial goods”—the stigma of the trade deficit vanishes. Every pound held by a non-resident is not a liability to be redeemed but an export delivering real value today and tomorrow. In this light, concerns about “trade gaps” melt away. There never was a gap, only a continuous, global marketplace in modern money. Expecting floating exchange rates or protectionist policies to “close” this non-existent gap is as futile as expecting the mouth of the River Thames to seal itself shut.
Nobody, other than the statisticians, raises an alarm when London exports vast quantities of non-monetary gold; it is rightly seen as a thriving global marketplace. For precisely the same reason, we should celebrate when the world chooses to hold pounds. We should treat our currency as the successful export it has become. The phantom trade deficit is an idea whose time has passed; it deserves to be laid to rest once and for all.
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