Clearing Up This Mess

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 pass 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 recognized, 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

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 that 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.”3 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.”4 Instead he proposed an International Stabilization 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 Stabilization 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 that 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 destabilized 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.5

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; liberalize their banking systems; reduce government spending on everything except debt repayments; and privatize the assets which can be sold to foreign investors. These happen to be the policies which best suit predatory financial speculators.6 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.7

On Saturday the leaders of the G20 nations admitted that, “the Bretton Woods Institutions must be comprehensively reformed.”8 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.9

Is this the best they can do? No. As the global financial crisis deepens, the rich nations will be forced to recognize 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.

  1. Geoffrey Crowther, quoted by Michael Rowbotham, Goodbye America!: Globalisation, Debt and the Dollar Empire (Jon Carpenter, Charlbury, Oxon, 2000). []
  2. My sources are: Michael Rowbotham, 2000, ibid; Robert Skidelsky, John Maynard Keynes: Fighting for Britain 1937-1946 (Macmillan, London, 2000); Armand van Dormael, Bretton Woods: Birth of a Monetary System (Macmillan, London, 1978). []
  3. Lord Robbins, quoted by Armand van Dormael, ibid. []
  4. Harry Dexter White, quoted by Armand van Dormael, ibid. []
  5. Joseph Stiglitz, Globalization and its Discontents (Allen Lane, London, 2002). []
  6. Ibid. []
  7. E.g. Romilly Greenhill and Ann Pettifor, 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, April 2002; and Henry K Liu, “US Dollar hegemony has got to go,” Asia Times, April 11, 2002. []
  8. The G20 Summit, 15th November 2008. Declaration of the Summit on Financial Markets and the World Economy. The White House. []
  9. See this article. []
George Monbiot is the author of the best selling books, The Age of Consent: A Manifesto for a New World Order and Captive State: the Corporate Takeover of Britain; as well as the investigative travel books Poisoned Arrows, Amazon Watershed and No Man’s Land. He writes a weekly column for the Guardian newspaper (UK). Read other articles by George, or visit George's website.

4 comments on this article so far ...

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  1. bozhidar bob balkas said on November 18th, 2008 at 2:54pm #

    well, the rich people r mightily worried. planet’s getting poorer, dirtier, warmer, etc.
    what to do, what to do? the one way out wld be to use less, much less.
    another way wld be to change the basic structure of governance.
    educating children instead of miseducating them wld help a lot.
    more cooperation and less competition wld also help.
    less military and more special agents fighting crime or supervising drugs import.
    stop going to outer space and go into inner space wld also be beneficial.
    etcetc. and ab wars, another time. tnx

  2. Kevin Carson said on November 19th, 2008 at 12:20am #

    I think Keynes was right on corporate capitalism’s crises of overaccumulation and overproduction, but Keynesian aggregate demand management amounts to putting a bandaid on an arterial wound.

    The sheer enormity of what it took to end the Depression for the U.S. should give some indication of just how terminal the long-term crisis tendencies are. The crises of overaccumulation and overproduction were “solved” for the U.S. by, in effect, blowing up all the capital in the world outside the U.S., and then creating a permanent war economy to buy up the surplus output that the economy *still* couldn’t aborb. And when that wasn’t enough, the highway-automobile complex and mass suburbanization served as another of what Marx called the “counteracting tendencies” of the falling direct rate of profit. And there was also the creation of the tech industry, largely at DoD expense. Then neoliberal globalization as an outlet for surplus capital. Then the tech bubble. Then the housing bubble and derivatives–and you can see the outcome of that.

    Corporate capitalism seems to be running out of safety valves.

  3. AaronG said on November 19th, 2008 at 7:27pm #

    Even though ”Keynes put forward a much better idea”, his idea was still within the framework of the existing system of nations and money etc. There is a better idea………….stop tinkering with the current system like a piece of software that has updates every 50 years, or else we’ll be living with the polar bears in the Saharan desert in 2080 theorizing about how smart we were to come up with ”Bretton Woods III or IV”. Get more radical and think about what things would be like if we simply got rid of two (not the only two!) imaginary entities that are ruining this planet – NATIONS and MONEY.

    If I, as a (extremely fit!!) human, go for a walk from Spain to Siberia I am aware of many changes in nature. The landscape and climate will change many times before I complete my journey – from the mountains of the Pyrenees to the snow of Siberia, and everything in between – and the type of animals that I observe will also change. What I’m unaware of is exactly when Spain finishes and when France begins, unless I have man-made items like a political map, GPS, road sign welcoming me to France or a checkpoint on the road. I’m unaware of the political boundaries, but I also don’t care about their existence. It doesn’t add or take away from the enjoyment of the walk. Nature doesn’t care where the boundary is either – it’s only an imaginary line on a map. It’s not as if I’m gonna start WWII over some petty political boundary. Or am I?

    Similar with money. I can plant a seed and produce some food. This process has got nothing to do with money. Why should it? Money is just a series of zero’s and one’s inside a computer, whereas my seed and stalk of corn is real – I can taste it and it’s good. The sweat on my brow as I finish the planting is real. The beer that I enjoy at the end of the day’s work is real. The house that I built with my real hands is real – what does the bank have to do with any of this?

    Until we start thinking outside the square we will continue to be stuck inside it, scratching around for ‘better’ or ‘worse’ solutions that are really just modifications to previous attempts, but nonetheless are solutions that are still inside the box.

    http://www.watchtower.org

  4. Brian Koontz said on November 19th, 2008 at 11:01pm #

    “But to understand why the world economy keeps running into trouble, they first need to understand what was lost in 1944. ”

    They don’t want to understand. What they understand is highly controlled, through a strict vetting process. This won’t make the cut.

    Regular people are too dangerous nowadays. The position of the elite is too precarious. They can’t afford to give concessions like understanding what you’ve written.

    If they understand this, what’s next? Understanding income redistribution? Understanding socialism?

    It’s better to take a hard-line stance. Socialism is what Barack Obama represents. Income redistribution is tax cuts. A revision to Bretton Woods will save the West.

    *Our* truths will not go down without a fight. “Our” truths fight against “their” truths, and we’d better make sure ours win.

    In the end, everyone who matters will say “Barack Obama is a socialist” and “income redistribution is tax cuts” and maybe even “George Monbiot is a liar”.

    Or so they desire. Are we able to make sure they fail?