Buy European

To keep it simple, imagine your group of importers and exporters. The exporters have excess US money from the trade imbalance. Now imagine they “sell” those US dollars to the German government in return for German currency (I guess Euros these days). Now the German government has a bunch of US dollars. What do they do with them? Buy gold?

Imagine that there is only one bank in Germany and it is owned by the government. The bank “borrows” Euros to buy the US dollars off the importers. Imagine they borrow it from the European Central Bank (ECB). But then the importers deposit the Euros in the bank. The bank now has excess Euros from deposits equal to the money they borrowed. So, they pay the ECB back. Now the bank “owes” those companies Euros. They will have to pay that money back if the companies withdraw their deposits. So, now the German government has a bank that “owes” the value of its deposits AND they have a pile of US dollars. They can now go buy a bunch of gold with those US dollars and keep it in a vault in New York.

Of course, even though the gold is backing those deposits in the German bank, the German bank can still creates loans against the deposits they have. In fact, due to fractional banking, they can loan out way more than that. So, the money those German companies deposited into the German bank will make the German bank rich (even though the bank already spent the money on US gold). By the time those companies go to withdraw their deposits, the German bank will have enough profit to pay them without having to sell the gold. This is because the German economy has grown enough to pay them. Plus, they are probably going to spend it in Germany with somebody who will just deposit it again at the bank. So, the money never really leaves the bank. Which is why we can loan it out (even if we don’t have it). Wonderful stuff.

You can make it more complicated by making more banks that take deposits from the individual German companies in a more distributed way and that borrow from each other or from the “central” bank. You can say that not all the companies deposit their trade surplus but instead spend it with or invest on other German companies. But that just moves the money around. In the end, it works like above. All the deposits make it back to the central bank eventually. Even if the US dollars get converted to Euros in 1000 places, it all becomes Euros in the local economy and foreign investment by the government eventually. So, we can simplify and pretend that trade surpluses and deficits between economies are between the countries directly (government to government).

It is really central bank to central bank though. So, if all the German companies above decide to exchange their US dollars for Euros at French banks instead of German ones, it gets more complicated. But you get the idea.