Let’s say I owe you $10,000, and you owe me $8,000. Will I give you $10,000 so that you can turn around and give me $8,000? Of course not. So it is with banking institutions. A clearinghouse is a place where everyone in the group, who are members of the clearinghouse, cancel debts and then keep track of who owes who what. After we cancel out the $8,000, the system notes that I owe you $2,000. The Society for Worldwide Interbank Financial Telecommunications (SWIFT) acts as an international clearinghouse by fast and (allegedly) secure international financial transfers. SWIFT transmits information using a standardized system of codes assigned to each bank. It does not hold funds or manage client accounts, but it is a system of tracking credits and debits amongst the world banks.
The Federal Reserve acts as a clearinghouse nationally, but SWIFT serves as a clearinghouse internationally. Ever since its beginning in 1973, the United States has been the de facto leader of SWIFT, and as such, it has abused its authority by sanctioning countries. The word sanction has two nearly opposite meanings: approve something, to punish. America has expelled countries from SWIFT as a way of sanctioning them for not supporting its policies. When the French bank BNP Paribas violated US laws by trading with Iran, Sudan, and Cuba, the US threatened to exclude the bank from SWIFT. Paribus fell into line with US policies because it depends on SWIFT for international transactions. Without SWIFT, a bank, a business, or a country may not buy and sell internationally.
Some countries have bilateral agreements using their currencies, the Chinese yuan, or gold to circumvent the SWIFT system and to avoid American sanctions. For example, Moscow and Tehran have turned away from the greenback in bilateral trade and are using the Russian ruble and Iranian rial for payments. Russia and China have been dumping the US dollar from their international reserves while increasing their gold holdings. Because of America’s hubris, its many military exploits, its lack of effective leadership, this trend of countries circumventing SWIFT will continue, and living for Americans will get a lot more expensive and a lot more precarious.