News & Analysis

What if Keynes Had Won the Argument on a Global Currency?

19 February 2014 By Tom Williams


The Breton Woods conference of 1944 is best remembered for establishing the IMF, World Bank and WTO. But the conference also saw John Maynard Keynes make a fascinating proposal for a global currency, a proposal the United Kingdom adopted as its official negotiating policy.
Keynes lost the argument to the U.S. representative Harry Dexter White, but what if he hadn’t?
Keynes’ Proposal
Keynes is often misrepresented as having touted a single, universal currency to supersede national coinage worldwide. What he actually proposed was far more nuanced. His proposal was twofold. Firstly that a global currency named the bancor would be introduced, in which all global trade would be transacted. Secondly that a global body – the International Clearing Union – would be set up to govern and facilitate international trade.
The bancor would be used as the medium through which international transactions were made. National currencies would be pegged to the bancor at a fixed exchange rate, and bancors would be used to transfer wealth between countries. The bancor itself would be fixed to the price of gold (the gold standard was still in effect at the time of the proposal). Each country would hold an account in bancors. They would be permitted an overdraft of up to 50% of GDP on which they would be charged interest. But they would also be charged interest of 10% on any surplus, and the entirety would be confiscated if over the equivalent value of the overdraft by the end of the year. A powerful incentive to spend.
Implications of the Global Currency
The ramifications of this system would be huge. Firstly, the Forex market would never have existed. Currencies would no longer be traded with each other directly, but rather intermediated by bancors at a fixed rate, rendering the currency market redundant. In theory this should practically eliminate transaction costs, freeing up the movement of money between nations.
The proposals for the handling of deficits and surpluses introduce a state of equilibrium that looks particularly appealing in light of the national debt issues currently being experienced across the globe. The in-built mechanisms would maintain a level playing field in international trade. Should a large credit accrue, the currency would have to appreciate against the bancor and spend the balance down. If a deficit builds, the national currency would have to devalue.
Although this stands as current monetary best practice already, the system is crucially different in two respects. Firstly there are strict limits placed on the size of both deficits and surplus. Secondly, mechanisms are institutionalised whereby credits pay the debts of other nations. In this way, trade imbalances – such as that between China and the U.S. – are prevented from developing.
The entire mechanics of national debt would be completely different.
There are a number of roadblocks towards such a system developing. It forces successful countries to give up their wealth for the sake of global equilibrium, with the only incentive being the possibility of the tables being reversed in the future. As the biggest creditor at the time, this is arguably the reason the U.S. was opposed to it in the first place. As the biggest debtor at present, arguably they should have taken a different position. Worse, in the same way that higher rate taxpayers often resent paying for the welfare of others, creditor nations could feel their hard work is subsidising the failure of others – much in the way German bailouts of Greece and Cyprus are viewed by many Germans.
The system also severely limits monetary control on a national level, as strict limits and measures are imposed centrally. Though these limits and controls may reflect good monetary policy, the resentment towards centralised EU legislation should be enough evidence that national agency is a point of pride for many – and that is significant.
Politically, the question of who governs the International Clearing Union is also fundamental. The U.S. stranglehold over the IMF is already a point of contention. To trust a body with so much power to be completely independent is not in our nature.
China and Bitcoins
Whatever one may think of the International Clearing Union, the idea of a supranational reserve currency has gained renewed credence in light of the financial crash. China actively proposed the idea during the 2009 G20. Their case is simple. The current status quo, where the USD is the reserve currency, exposes the rest of the world to the economic woes of one nation. As the largest holder of U.S. government debt, they have a particular interest. As the dollar devalues, so does the value of their bond holdings.
Many pundits put the recent rupee troubles down to U.S. decisions on QE and tapering. A global reserve currency, untethered to any one nation, would put an end to this effect. It would also remove the privilege of the U.S. running up the highest debt in the world, staying afloat due to the importance of the dollar. That currency could already be here. In light of disaffection with the dollar-as-reserve, talk of bitcoins has turned to its potential as a reserve currency due to its nature as supranational, extra-governmental and finite. With its ultra-low transaction costs, it may end up the de facto bancor regardless of international governance.
A Keynesian World
What if Keynes had won the argument at Breton Woods? The International Clearing House may have heralded an era of unprecedented global prosperity. The near-elimination of imbalances may have promoted hitherto unseen levels of international trade, supported by the ease of a supranational global currency, to the benefit of all. Or, probably more likely, it may have collapsed under the weight of politics like so many other international institutions.
As to the bancor, that’s an argument he may yet win.

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