China wants the world to adopt a global currency. What their central bank proposes looks a lot like what John Maynard Keynes drew up in advance of the 1944 Bretton Woods conference. While that American dominated gathering gave birth to the IMF and the World Bank, it rejected the Keynes plan, which included creation of a truly world money.
The Chinese suggestion has drawn considerable attention in advance of the G20 world economic summit in London, April 2. Because it calls into questions the continued use of the U.S. dollar as the world money, the plan has been rejected outright by the Obama administration, and dismissed by American commentators, including the liberal Economic Policy Institute, as well as conservative groups.
However, a select panel headed by American economist Joseph Stiglitz, and reporting to the President of the United Nations General Assembly, also favours using a global monetary unit.
The Chinese cite Robert Triffin, one time Yale economist, who pointed to the dilemma for the world of using the U.S. dollar as the world currency. Forty years ago, the domestic priorities of the Americans were often in direct conflict with needs of the world economy for liquidity, i.e. more dollars. Today, in a world awash in dollars, the U.S. has no way to simultaneously protect the value of the dollar and fight recession.
The Stilglitz panel looks aghast at the many poor countries around the world following strict IMF directives, and being side-swiped by out of control financial developments in the U.S. Stiglitz himself talks about a long series of financial upsets leading to the need for another world conference along the lines of Bretton Woods.
Under his plan, Keynes foresaw financial relationships among nations taking place much like relations between domestic banks and a central bank. Each country would have an account with a world central bank or clearings union as he called it. Accounts would be dominated in a world monetary unit -- bancor -- from the French "bank gold." Surplus countries would lend to the clearings union, and deficit countries could draw upon it. All transactions would take place in bancor. As assets would equal liabilities, the clearings union itself would always remain solvent.
Under the Keynes plan all countries in deficit within the clearings union would have access to credit in the form of bancor. As members of the union they would not have to fear running out of foreign currency.
Keynes foresaw banks in union members countries using domestic money to settle up overseas accounts with their central bank. Using bancor, central banks then settled outstanding overseas accounts within the clearings union. Instead of countries being indebted to each other, each country was a debtor or creditor with the union.
The difference was hugely important. Without access to bancor credit, indebted countries were forced to cut back spending, increase taxes, devalue their currencies and raise interest rates. With access to bancor -- they could spend on domestic priorities.
Keynes was fearful of unemployment and depression spreading from country to country. After all he had formed his ideas about the world in the context of the great depression of the 1930s. A series of countries running short of foreign exchange, shutting down spending and restricting imports, lead directly to the international transmission of recession and plunged the world into depression.
In 1944, the Keynes plan for a world monetary unit was rejected under pressure from Wall Street. What Wall St., and therefore the U.S. preferred, was the system of foreign exchange trading that built up around the use of the U.S. dollar as the means of payment, unit of account and storehouse of value in world trade and finance. With first millions, then billions and finally trillions in daily foreign exchange trading taking place using banks as intermediaries, the value of the business was huge.
In 1944 Wall St. refused to give up what proved to be the lucrative foreign exchange business to a clearings union operating without trading currencies on markets, and without trading fees for banks. Again, in 2009, the bankers, and the governments that do their bidding, do not want to stabilize the world economy through the creation of a true multilateral institution using an agreed common world currency.
The IMF did create SDRs (Special Drawing Rights) in 1969. A money for central banks only, they were conceived when it was feared the world would run short of U.S. dollars. But, the situation reversed itself, and SDRs never really circulated.
Today, the best way to stabilize the world economy, and promote the millennium development goals of the UN is through a new Keynes plan, that could be based on SDRs. Unfortunately, the U.S. have veto powers at the IMF, which makes its reform into a clearings union type of arrangement highly unlikely at this time.
The G20 final communiqué has already been leaked, and not surprisingly the draft carries no mention of the Chinese proposal. However, the idea of a world currency deserves the widest attention around the world. The first step is to increase the role for China at the IMF, and eliminate the U.S. veto.
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