Globalization and an International Monetary Clearing Union
This paper has been included in the publication
“Ideas towards a new international financial architecture?”
Abstract
What is required today is a modern day variant of the “Keynes Plan” that was presented at Bretton Woods– but was vetoed by Harry Dexter White , the leader of the US delegation to Bretton Woods. This paper provides the economic explanation of why the principles behind the “Keynes Plan” are essential to improve the international payment and financial system and then describes how a 21 century International monetary Clearing Union would operate.
Paul Davidson, pdavidson@utk.edu, Holly Chair of Excellence Emeritus, University of Tennessee
Clearing will finally result in claims on debts , often appearing as inrepayable.
Dear Paul,
Thanks for sharing your proposal about the international financial architecture. Two questions:
a) In the short-medium-term, the current SDR (special drawing rights) system based on a basket of currencies could be developed as a transition period for improving the payment system toward an international monetary clearing in the future?
b) How can we create the conditions to enhance a more fruitful dialogue around this proposal considering the current challenges of the world order?
Special Drawing Right can be a transition but not a permanent solution to provide for my International Monetary Clearing Union.
Creating conditions for an intelligent dialogue is almost impossible. If we could convince a U.S. President to call a meeting of the G7 to discuss the clearing union concept we might provide a basis for a fruitful dialogue. Clearly, however, President Obama is still a captive of classical economics and thinks the way for the US to reduce its international indebtedness is for American firms to become “more competitive” internationally and therefore sell more exports [as he indicated in a throw away line in his 1915 State of the Union address to congress].But more competiveness means foreign firms become less competitive — and this is merely a way of the US exporting its unemployment and solves nothing. The solution requires increasing a balanced growth in effective global market demands..
Perhaps we could have President Bernie Sanders accept the idea of such a fruitful dialogue! But he is unlikely to become president.
So my view is that the only thing that will create conditions for a fruitful dialogue would be for a significant global financial and economic crisis to occur — but this would be a terrible price to pay to get the G7 leaders open to new economic ideas.
If my IMCU proposal is accepted, then creditors such as Germany, etc will have to spend additional funds on goods and services produced in debtor nation — thereby providing the wherewithal for the debtor to work his way out of debt.
p. 5 Theoretically any nation experiencing a deficit in its international balance of payments must finance this deficit by either (1) the deficit nation drawing down reserves or (2) by the deficit nation borrowing funds from the rest of the world, says Davidson. The point White made, and this is the major discussion issue with Keynes, is seignorage. If there is a sole international currency, the country that issues that currency can do so without any restrictions. The point was how to get rid of the Sterling area and convert international trade and finances into dollar denominated activities using the US$ as the payment currency, and store of value, and not only the unit of account.
The argument to introduce the dollar as the sole currency was made strongly in the Atlantric Charter, and that is why it was not signed by the Brits, but the point was also made in the war loan conditionalities (called the lend lease agreement) and in the articles of foundation of the IMF. White made sure both the Imperial Customs Union (Sterling area) and the Union Aduanera del Sur were dissolved as part of the free trade element of Bretton Woods. The benefit for the US is that it can hold any external deficit as long as the selling country is willing to hold dollars as international reserves. This is not possible for any other economy.
p.7 The morale of this illustration is that if the Chinese bought goods from the United States instead of buying United States Treasury bonds, then \the Chinese government would make available goods that could improve Chinese real living standards while American workers would have more employment and enough income to afford all the Chinese imports they bought without having to go into debt to the Chinese.
The problem Davidson presents in this example is the reverse of what White had in mind. It did not ocurr to him that the US could be a dficit country permanently and that the surplus country might not want to buy more from it but keep reserves instead. Keynes was clear that in a two currency system (Sterling area wiith 58 member states and dollar area with 44) the way out of this problem was creating a world central bank that would issue a unit of account (BANCOR) made up of both. The BANCOR was a two currency basket and the central bank would serve to transfer back the surplus from one currency block to the other. The surplus block had to consume more from the deficit block in order to restore balance. The central bank would issue more BANCORS as the total trade and fianncial services grew.
Instead, with the White plan in effect, the world swirls around the dollar and how central banks invest the surpluses in dollars. This means more US dollar denominated bonds. The size of the acccumulated US external deficits over the past fifty years or more years is what explains the dollar denominated international financial markets and not only international reserve holdings, if we remember the creation of the Eurodollar market.
Says Davidson that a mechanism must be designed to adequately resolve any persistent trade and international payments imbalances that could occur whether the exchange rates are fixed or flexible. The mechanism should be designed not only to resolve these imbalance problems but also to simultaneously promotes global full employment –rather than just assume global full employment will always occur. Such a mechanism is embedded in the Keynes Plan for international trade and payment imbalances, he suggests.
The problem is that not all exchange rates are now defined only by international reserve movements but also by futures operations in the London currency markets. Thus, exchange rates like the Brazilian real, for example, can suffer major price variations, without any significant international reserve changes, as the Brazilian real, for example, is traded in the London currency market. This is true for the Euro, yen, yuan, mexican peso and a few more currencies quoted by Reuters in the London market. The Bancor/world central bank design was interesting in the two currency block world of the early 1940’s. In a more plural and at the same time more concentrated currency market, with more dollar denominated financial assets than real economic activity it is not clear how this might work.
A world currency unit is a good start. Who issues this? The problem posed by the size of the dollar denominated financial markets is if a balance can be struck, à la Keynes, with the surplus countries financing the deficit ones. In Keynes design, the rest of the world would need to buy more from the US in order to return the dollars back to the US. With massive dollar denominated international financial markets, returning all of these back to the US would generate massive inflation. But also, who would do it?
Keynes concluded that an essential improvement in designing any international payments system requires transferring the major onus of adjustment from the debtor to the creditor nation. In a world of closed economies, this was limited to trade. If we add the financial sector into this equation, it turns out you can have a trade deficit country with a massive financial surplus, as is the case of the US, having made a virtue out of necessity.
It is true that adjustment is borne by the deficit country, instead of the surplus country, but t is also true that one deficit country injects its currency as international liquidity and this goes into the international financial markets. At the same time, the injection of liquidity by he FED has had an impact on international commodity prices which then means that the FED is starting to act as a world central bank, affecting commodity prices, and world economic growth. This places the exchange rate discussion in a new light.
It is true that since 1971 the international payments system often impedes rapid economic growth and even induce recession for many nations of the world but it is also true that the international stabiization fund created in 1933 by Keynes in Great Britain (for the Sterling area) and copied by White in the US for the fixed Dollar/gold parity has an heir. That is why “ In 1994, for example, United States Treasury Secretary Robert Rubin encouraged President Clinton to use American funds to lend to Mexico to solve its financial crisis and thereby save the wealth of international buyers of Mexican bonds. This solved the problem.” The international currency stabilization fund was used. This has been written into the US fiscal budget since 1935. It was taken out of the British budget when the Stering area disappeared. Should we introduce currency stablization funds into all major international currency fiscal budgets? Or should central bank swaps be introduced between neighbouring countries? Or between major currency (London traded) central banks?
Davidson is right to a point but the financial dimension changes some of Keynes’ arguments. More so for the US itself, which Keynes had in mind. This is what Kregel also refers to in is work
very interesting comment. But the thrust seems to be that we have relied on free international financial markets for so long , that the Keynes Plan type of solution that I suggest can not be instituted without harming many international financial operations.
Well we see in the Greek crisis what free international financial markets have accomplished. Creditors have to provide more loans to make sure that the loan obligations they already hold do not go bad! The question is to provide solutions not to cry things have become some much more complicated
The principle is that solution is always in the hands of creditors– not debtors — as the latest Greek bailout offer indicates. But if creditors put wrong terms on the loans –as Germany is insisting on– things can only get much worse.