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Time for Keynes’ real ideas

Written By: - Date published: 6:03 am, November 23rd, 2008 - 19 comments
Categories: economy, International - Tags:

The article below is well worth a read for anyone concerned about the global economic crisis. It looks at Keynes plan for managing the balance of international trade. It is imbalances in the system that we have now that leads to economic crises and fuels the speculative markets, especially the currency traders. It is the collapse of these speculative markets, because the participants are greedy gamblers and inadequately regulated, that has landed us in this economic crisis. 

 

John Maynard Keynes had the answer to the crisis we’re now facing; but it was blocked and then forgotten.

By George Monbiot. Published in the Guardian 18th November 2008

Poor old Lord Keynes. The world’s press has spent the past week blackening his name. Not intentionally: most of the dunderheads reporting the G20 summit which took place over the weekend really do believe that he proposed and founded the International Monetary Fund. It’s one of those stories that passes unchecked from one journalist to another.

The truth is more interesting. At the Bretton Woods conference in 1944, John Maynard Keynes put forward a much better idea. After it was thrown out, Geoffrey Crowther – then the editor of the Economist magazine – warned that “Lord Keynes was right the world will bitterly regret the fact that his arguments were rejected.”(1) But the world does not regret it, for almost everyone – the Economist included – has forgotten what he proposed.

One of the reasons for financial crises is the imbalance of trade between nations. Countries accumulate debt partly as a result of sustaining a trade deficit. They can easily become trapped in a vicious spiral: the bigger their debt, the harder it is to generate a trade surplus. International debt wrecks people’s development, trashes the environment and threatens the global system with periodic crises.

As Keynes recognised, there is not much that the debtor nations can do. Only the countries which maintain a trade surplus have real agency, so it is they who must be obliged to change their policies. His solution was an ingenious system for persuading the creditor nations to spend their surplus money back into the economies of the debtor nations.

He proposed a global bank, which he called the International Clearing Union. The bank would issue its own currency – the bancor – which was exchangeable with national currencies at fixed rates of exchange. The bancor would become the unit of account between nations, which means it would be used to measure a country’s trade deficit or trade surplus(2,3,4).

Every country would have an overdraft facility in its bancor account at the International Clearing Union, equivalent to half the average value of its trade over the past five years. To make the system work, the members of the Union would need a powerful incentive to clear their bancor accounts by the end of the year: to end up with neither a trade deficit nor a trade surplus. But what would the incentive be?

Keynes proposed that any country racking up a large trade deficit (equating to more than half of its bancor overdraft allowance) would be charged interest on its account. It would also be obliged to reduce the value of its currency and to prevent the export of capital. But and this was the key to his system he insisted that the nations with a trade surplus would be subject to similar pressures. Any country with a bancor credit balance which was more than half the size of its overdraft facility would be charged interest, at 10%*. It would also be obliged to increase the value of its currency and to permit the export of capital. If by the end of the year its credit balance exceeded the total value of its permitted overdraft, the surplus would be confiscated. The nations with a surplus would have a powerful incentive to get rid of it. In doing so, they would automatically clear other nations’ deficits.

When Keynes began to explain his idea, in papers published in 1942 and 1943, it detonated in the minds of all who read it. The British economist Lionel Robbins reported that “it would be difficult to exaggerate the electrifying effect on thought throughout the whole relevant apparatus of government nothing so imaginative and so ambitious had ever been discussed”(5). Economists all over the world saw that Keynes had cracked it. As the Allies prepared for the Bretton Woods conference, Britain adopted Keynes’s solution as its official negotiating position.

But there was one country – at the time the world’s biggest creditor – in which his proposal was less welcome. The head of the US delegation at Bretton Woods, Harry Dexter White, responded to Lord Keynes’s idea thus: “We have been perfectly adamant on that point. We have taken the position of absolutely no”(6). Instead he proposed an International Stabilisation Fund, which would place the entire burden of maintaining the balance of trade on the deficit nations. It would place no limits on the surplus that successful exporters could accumulate. He also suggested an International Bank for Reconstruction and Development, which would provide capital for economic reconstruction after the war. White, backed by the financial clout of the US Treasury, prevailed. The International Stabilisation Fund became the International Monetary Fund. The International Bank for Reconstruction and Development remains the principal lending arm of the World Bank.

The consequences, especially for the poorest indebted countries, have been catastrophic. Acting on behalf of the rich world, imposing conditions which no free country would tolerate, the IMF has bled them dry. As Joseph Stiglitz has shown, the Fund compounds existing economic crises and creates crises where none existed before. It has destabilised exchange rates, exacerbated balance of payments problems, forced countries into debt and recession, wrecked public services and destroyed the jobs and incomes of tens of millions of people(7).

The countries the Fund instructs must place the control of inflation ahead of other economic objectives; immediately remove their barriers to trade and the flow of capital; liberalise their banking systems; reduce government spending on everything except debt repayments; and privatise the assets which can be sold to foreign investors. These happen to be the policies which best suit predatory financial speculators(8). They have exacerbated almost every crisis the IMF has attempted to solve.

You might imagine that the United States, which since 1944 has turned from the world’s biggest creditor to the world’s biggest debtor, would have cause to regret the blinkered position it took at Bretton Woods. But Harry Dexter White ensured that the US could never lose. He awarded it special veto powers over any major decision made by the IMF or the World Bank, which means that it will never be subject to the Fund’s unwelcome demands. The IMF insists that the foreign exchange reserves maintained by other nations are held in the form of dollars. This is one of the reasons why the US economy doesn’t collapse, no matter how much debt it accumulates(9,10).

On Saturday the leaders of the G20 nations admitted that “the Bretton Woods Institutions must be comprehensively reformed.”(11) But the only concrete suggestions they made were that the IMF should be given more money and that poorer nations “should have greater voice and representation.” We’ve already seen what this means: a tiny increase in their voting power which does nothing to challenge the rich countries’ control of the Fund, let alone the US veto(12).

Is this the best they can do? No. As the global financial crisis deepens, the rich nations will be forced to recognise that their problems cannot be solved by tinkering with a system that is constitutionally destined to fail. But to understand why the world economy keeps running into trouble, they first need to understand what was lost in 1944.

www.monbiot.com

*Erratum: Professor Tony Thirlwall, an expert on this subject, writes to tell me that “The proposed interest rate on credit and debit balances was 1% if the balance was more than 25% of quota and a further 1% if the balance went above 50% of quota.”

References:

1. Geoffrey Crowther, quoted by Michael Rowbotham, 2000. Goodbye America! Globalisation, Debt and the Dollar Empire. Jon Carpenter, Charlbury, Oxon.

2. My sources are:
Michael Rowbotham, 2000, ibid;

3. Robert Skidelsky, 2000. John Maynard Keynes: Fighting for Britain 1937-1946. Macmillan, London;

4. Armand van Dormael, 1978. Bretton Woods: Birth of a Monetary System. Macmillan, London.

5. Lord Robbins, quoted by Armand van Dormael, ibid.

6. Harry Dexter White, quoted by Armand van Dormael, ibid.

7. Joseph Stiglitz, 2002. Globalization and its Discontents. Allen Lane, London.

8. ibid.

9. eg Romilly Greenhill and Ann Pettifor, April 2002. The United States as a HIPC (Highly Indebted Prosperous Country) how the poor are financing the rich. Jubilee Research at the New Economics Foundation, London

and

10. Henry K Liu, April 11 2002. US Dollar hegemony has got to go. Asia Times.

11. The G20 Summit, 15th November 2008. Declaration of the Summit on Financial Markets and the World Economy. The White House.http://www.whitehouse.gov/news/releases/2008/11/20081115-1.html

12. See http://www.monbiot.com/archives/2006/09/05/still-the-rich-worlds-viceroy/

19 comments on “Time for Keynes’ real ideas ”

  1. Bill 1

    Thanks for the very informative post/link Steve.

    Maybe you, or somebody else can answer a question I have about the idea of the ‘bancor’ as a reserve currency as in relation to :-

    “A “new Bretton Woods” system would have to replace that ( the US dollar) with what is generally referred to as a “market basket of currencies” that reflects the relative importance of the dollar, euro, yen, and other currencies.”

    http://www.zcommunications.org/znet/viewArticle/19707

    Allowing for the machinations around surpluses and deficits as outlined in Monbiot’s piece, would it be reasonable to view a ‘market basket of currencies’ as having the same effect as a ‘bancor’? Put another way, are the authors of the above linked piece actually talking about a ‘bancor’ but using different terms or are the two suggestions separate and distinct?

    I can’t figure it out and would appreciate thoughts on it.

  2. RedLogix 2

    Fascinating. Thanks for this…. and first thing on a Sunday morning too! I must confess to being woefully underinformed about the orginal Bretton Wood conference, and the enormous impact it has had on our world.(Until a few months ago I didn’t even know that it was Keynes who had chaired it!)

    Several thoughts come to mind.

    1. I wonder if the USA had not blocked it, if Keynes International Clearing Union might not have evolved by now a global currency that was the sole medium of exchange for all international trade and financial transactions. Harry White might well have foreseen the ICU has a direct threat to the dollar hegemoney for this very reason.

    Such a development alone would have eliminated in one stroke all the parasitical hedge funds and currency speculators, whose monstrous overleveraged risk now threatens the real economy with fiscal carnage.

    2. I’ve had relatively little formal education in economics, but the two figures that stand most clearly in my mind are Keynes and Galbraith. I’m taking a punt here, but perhaps it was the Friedmanites and the subsequent Reagan/Thatcher era that caused Galbraith to loose much of his influence and popularity. Is it that why we hear so much of Keynes, but these days much less of Galbraith?

  3. Bill 3

    Been reading a good few articles on the crisis and although I am no economist, I get the distinct impression that propositions from the bankers, financiers and politicians , intended to fix the problem are going to be as curative as applying leaches to cure anaemia.

    Generally speaking, doesn’t common sense dictate that you do not allow those who caused a particular problem to dictate the solution?

    Yet, we will no doubt be told we must ‘leave things to the experts and specialists’ and sadly, most people probably will.

    So having broken our legs they will probably, eventually, cobble together some crutches for our use, throw us back on the 100m sprint track of Capitalist competition and expect our thanks for their sterling efforts.

    Something to look forward to.

  4. RedLogix 4

    Following the links I found this from the International Trade Union Congress, held just days ago ahead of the G20 Summit.

    Not only a powerful condemnation of what has happened, but unlike Key’s tepid waffle in Lima (which said nothing that everybody in the room didn’t already know), it proposes a whole raft of concrete and radical reforms.

    Yet at both the G20 and APEC summits Bush is blocking every attempt at reform, just as the USA has blocked all attempts at global reform for 80 years. It occurs to me that in just a few short years, Bush’s moronic refusal to act at this critical time, his obtuse defense of “free markets”… might well be remembered as even a greater mistake than the invasion of Iraq.

  5. The “beggar thy neighbour” inter-nation differentials that are required to facilitate big gains for the likes of ambitious currency traders would be threatened by a bancor system…

    When multinational finance holds so much more power than nation states – and has infiltrated their administrative ranks so thoroughly – don’t expects don’t expect any such sense to see the light of day…

  6. rave 6

    Unfortunately Keynes didnt have the answer at Bretton Woods and he still doesnt have the answer today. His scheme was utopian and remains so.

    Monbiot points out clearly why it wasnt in the interests of the US ruling class to adopt Keynes scheme. It would have lost its advantage as the hegemonic imperialist power to have its currency designated as the world currency.

    Britain on the other hand had already lost it hegemony. Keynes requirement that creditor nations export their surplus capital to avoid having it confiscated was what Britain had been doing for a century anyway. [Such surplus would not of course have been confiscated by an international clearing house, but as surplus capital it would have devalued rapidly unless invested abroad to return super-profits]. This system of capital export was called the British empire.

    Both the British and US ruling classes understood that the name of the game was not balancing trade between nations, but the rich nations buying up and owning the poor nations. That way their monopoly corporations could trade with themselves and cut out the other countries. They opted for the best way to do it given their relative positions as former and current hegemonic powers respectively.

    So there was nothing in Keynes scheme to challenge the capital export of the big powers in buying up the property of the weaker powers. Britain had done it for a century, and how the US could continue to do it without challenge and as we have seen in the last 30 years with a ruthless efficiency.

    All Bretton Woods did was to reflect the interests of the then hegemonic US. And today the US will not give up that hegemony by any post-Bretton Woods agreement.

    That means that at Bretton Woods Keynes scheme was already utopian, and that today any attempt to revive it sows massive illusions about the possibility of reforming global capitalist system heading for depression and inter-imperialist war.

    The way out of this is for the exploited and oppressed masses who’s economic resources are owned by US and other imperialist multinationals to nationalise those assets without compensation and use them to meet the basic needs of the people. All IMF, WB etc debts should be defaulted on and national and regional currencies that are based on the values of the nationalised assets put into circulation by state banks.

    Instead of a collapse of world trade caused by warring imperialist powers that would see massive destruction and hoarding of resources, we would have the basis of trade grow from a local, regional and eventually global scale based on assets owned by the people and valued by the labour required to produce them.

    There can be no rebalancing or redistribution of incomes among nations or people when a tiny minority owns the vast accumulated wealth of the world and has the power to prevent any change in this system. The change will only come when this concentration of wealth is expropriated by the people who produce it in the first place.

  7. Ianmac 7

    As an uninformed spectator, I have learned heaps today about Bretton Woods and the intent of Keynes. Thanks Steve. I have read of the effect of the IMF “rebuilding” Vietnam, (Cambodia?) by investing huge amounts of money in building up the tourist industry by building very flash hotels but staffing with foreigners and profits going out of the country leaving the natives worse off than before. And osing the cooperative nature of education and health to privatisation ordered by the IMF. The end product is that the nation ends up more indebted than before.
    How would Keynes plan prevented this?
    And what is the plan for NZ in the short or medium term?
    What a pity that a consortium of like minded nations couldn’t form their own balance of payments (bancor?) system independent of the big bully nations. (I am writing from knowing little. Apologies!)

  8. Brian Lee 8

    If you really want to understand what Keynes had to say about the importance of international economic cooperation, including internationally coordinated fiscal and monetary policies and effective international economic institutions, and you don’t have time to read the 30 volumes of his Collected Writings, you might like to try biographies of Keynes by
    – Donald Moggridge
    -Robert Skidelsky
    – Roy Harrod, and
    – Donald Markwell’s “John Maynard Keynes and International Relations”.

  9. Redlogix,
    I’m taking a punt here, but perhaps it was the Friedmanites and the subsequent Reagan/Thatcher era that caused Galbraith to loose much of his influence and popularity. Is it that why we hear so much of Keynes, but these days much less of Galbraith?

    Betcha backside on it! The so-called Austrian attack – (meeters at Mont Pelerin, including anti-statist Hayek et al) have deliberately aligned Keynes with statist ‘answers’. Re Galbraith, J.K.’s son remains a chip of the old block, teaches Texas, and reads well in sometimes extensive articles.. if you are so inclined.

    Rave, I sense your seeming reliance on George Monbiot’s piece has you open unduly harsh on J.M.K. American bankers had big problems with this guy whose intellect alone, not to mention high tonal voice and attitude toward their personal attacks on him proved wearying. I won’t go on about this here, but you may care to take in Witness’s Skinny on Banking series.. pointed.. insightful.. relevant especially in early parts 1-5 ..

  10. just curious. please explain US debt, the trillions of chinese holdings of us treasuries and the arab stakes in so many us corporations including such instruments of financial hegemony as Citigroup in the context of all the assertions above. can you use also refer to the actual amount of capital and loans controlled and held by the imf vs these foriegn holdings in the US. are you suggesting the US should nationalise all these holdings?

  11. “One of the reasons for financial crises is the imbalance of trade between nations.”

    It is?? How so? All the reasons have I seen argued about have nothing to do with trade, so how exactly does trade being about financial crises?

    “Countries accumulate debt partly as a result of sustaining a trade deficit.”

    No. They could run up debt because of a trade deficit, depending on what he means by this term, but there is no reason why you have to. As Donald J Boudreaux point it “Careful readers will note that a trade deficit bears no necessary relationship to debt”. There is no more a relationship between debt and a trade deficit for a country than there is between me running up debt and the trade deficit I have with my supermarket. I may run up debt, but then again I may not.

  12. Pascal's bookie 12

    Some linky love:

    On topic: A link heavy piece by John Quiggin at Crooked Timber talking about what’s next, (Citigroup going ni-nighs, and what that means. Not too big to fail, too big to rescue without Nationalisation of a company bigger than most countries,).

    Not so much on topic, but interesting: The GOP has got a problem. Well they’ve got a lot of problems, but this one is one they’ve faced before. Back when Bubba Clinton came into office he tried to reform the silly expensive and lackluster way the Americans deal with healthcare. Problem was, and is, that any reform is likely to be in the way of what the GOP calls socialism. It is also likely to improve health care for many, many, many, folks who vote GOP.

    Those voters are quite likely to like that, and are therefore likely to have a wee think about some of the feathers that the GOP has been selling to them for lo these many years. They are likely to conclude that those feathers about the evils of socialised medicine come from a horse, and that the GOP is no longer worthy of their vote, and that perhaps the ‘small government’ they have been buying all these years isn’t the best way of doing things. So the GOP goes hard out to make sure Bubba’s healthcare plan fails. The GOP can’t afford for health care reform to work. Think about that.

    day jar vue and read the linked bits in that piece, the GOP is quite open that they will try to wreck any reform of Healthcare, not because they think reform won’t work, but because it will be popular, and the GOP’s ideology will be shown to be fail.

    ‘That’s quite the party you got there. What do you call it?’

  13. rave 13

    Northpaw:

    Read Skinny’s blog. Interesting. Bears out my position. Difference between Keynes and White probably not the main story as Monbiot would have it. Main story is US hegemony led by big banks did not want a world state bank internationalising the business of private banks and role of dollar. Skinny’s history of Citigroup in Brazil makes clear why. US bought and sold LA regimes every few years. Nominally independent but actually US financial colonies. Neo-liberal period was really a generalisation of US post-war recolonisation of LA to the rest of the world.

    Phil Sage:

    I take it you are saying that the US is the biggest debtor nation so how can it be hegemonic over others. As I understand it US debt doesnt devalue the dollar because first, the dollar is the world reserve currency and it can print petrodollars at no cost. Second US foreign investment in other countries generates about the same mass of profits as that in the US domestic economy. So the US banks and corporates can export capital to take advantage of cheap labor and raw materials in other countries to maximise profits, yet continue to suck in imports and let others pay via bonds payable in petrodollars. Win Win.

  14. Ari 14

    That means that at Bretton Woods Keynes scheme was already utopian, and that today any attempt to revive it sows massive illusions about the possibility of reforming global capitalist system heading for depression and inter-imperialist war.

    I don’t think that word means what you think it means. Utopian is generally used to refer to ideas that are theoretically perfect but don’t work out in practice.

    Keynes’ ICU strikes me as being perfectly practical, but politically difficult to implement precisely because it tries to minimise debt.

    There can be no rebalancing or redistribution of incomes among nations or people when a tiny minority owns the vast accumulated wealth of the world and has the power to prevent any change in this system. The change will only come when this concentration of wealth is expropriated by the people who produce it in the first place.

    Actually, I’d say that as long as no part of establishing an ICU would have to go through the security council, it could easily pass the UN general assembly. Whether there are additional stumbling blocks is another question, of course, and I imagine that you’re quite correct that business interests wouldn’t like it. The Second Committee is also composed of nations that mostly don’t have large amounts of credit, too.

    Now, opposing it at a national level would indeed be more troublesome, and certainly something we could expect from parties like National & the Republicans, not to mention the PRC as a whole.

  15. Attention SP, rave, redlogix and interested others on this thread. Back when we were doing this commentary string I asked my buddy at witness (features the skinny on banking series) to come up with a paper I once read where Keynes recommended Roosevelt print more dough to facilitate recovery in the Depression… viz the original source of liquidity for an answer. Anyway, today the link came back. It’s on the guardian with full pdf access if you’d like that.

    I guess you’ll appreciate the irony of how rightwingers all too frequently slam keynesianisms etc without any regard to from whence wisdom came.. well now the Bernanke-panky and co look well and truly behoven. Along with their acolytes.. 🙂

  16. Pascal's bookie 16

    Thanks northpaw, “recrudescence” Crikey, ain’t he flash?

    Re your last para, the attached is fun . Adapted from a book by Jonathan Chait, (The Big Con: The True Story of How Washington Got Hoodwinked and Hijacked by Crackpot Economics).

    taste: re Cheney getting the supply side religion in 1974

    At that moment, there were a few points that Cheney might have made in response. First, he could have noted that the Laffer Curve was not, strictly speaking, correct. Yes, a zero tax rate would obviously produce zero revenue, but the assumption that a 100-percent tax rate would also produce zero revenue was, just as obviously, false. Surely Cheney was familiar with communist states such as the Soviet Union, with its 100 percent tax rate. The Soviet revenue scheme may not have represented the cutting edge in economic efficiency, but it nonetheless managed to collect enough revenue to maintain an enormous military, enslave Eastern Europe, fund ambitious projects such as Sputnik, and so on. Second, Cheney could have pointed out that, even if the Laffer Curve was correct in theory, there was no evidence that the U.S. income tax was on the downward slope of the curve–that is, that rates were then high enough that tax cuts would produce higher revenue.

    But Cheney did not say either of these things. Perhaps, in retrospect, this was due to something deep in Cheney’s character that makes him unusually susceptible to theories or purported data that confirm his own ideological predilections. (You can almost picture Donald Rumsfeld, years later, scrawling a diagram for Cheney on a cocktail napkin showing that only a small number of troops would be needed to occupy Iraq.) In any event, Cheney apparently found the Laffer Curve a revelation, for it presented in a simple, easily digestible form the messianic power of tax cuts.

  17. rave 17

    Thanks northpaw.
    Keynes was right about bosses not being tempted to invest until they could see the queues lining up to shop. They have been handed trillions and all they do is hoard it and buy up their failed competitors.
    Here’s a neat blog on solving the crisis by buying back Long Island.

  18. RedLogix 18

    PB,

    Thanks northpaw, “recrudescence’ Crikey, ain’t he flash?

    Keynes use of language is the product of a Cambridge/Eton system that educated it’s students to use words with precision. Most of us use less than a few thousand different words in daily use; whereas in that era, these men were trained to think with clarity and had a vocabulary of many ten of thousands of words to express themselves with.

    The current debased fashion is to select words primarily for their emotive impact; to serve spin by appealling to our fixed and pre-formed conceptions.

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