Clearing Up This Mess

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Damnthematrix
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Clearing Up This Mess


Clearing Up This Mess

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/

Ray Hewitt's picture
Ray Hewitt
Status: Gold Member (Offline)
Joined: Apr 5 2008
Posts: 458
Re: Clearing Up This Mess

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

That's an old mercantilist hobgoblin that never dies. When two countries trade, they trade money for goods. The two are of equal value; it's a wash. Whether there is trade between individuals, towns, cities or states, trade always balances. The problem arises when you have the currency of one nation acting as the base money for other nations. US creates dollars used to buy foreign goods. Hence, the world is flooded with dollars because foreign countries accumulate dollars to create create money from the dollars they accumulate. That's why we have these world currency fluctuations.

This phony trade imbalance has become an excuse for trade wars and competitive currency devaluations. It boggles my mind to think how stupd it is to fine countries for selling to American consumers for selling goods cheaper than their less competitive American corprations. Protectionism is a form of corporate welfare. Nobody wins.

Keynes was a quack, second only to Marx. Common sense should tell you that production comes out of prior savings. Keynes advocated debt consumption which has finally gone to it's logical collusion: financial collapse, because there is no savings to invest in production. It was all consumed.

I'm contemplating what's going to happen if or when foreigners ever start dumping dollars and sending them back to the US. There is no other solution outside some kind of a precious metal standard.

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