Keynes’s scheme was in fact applying two classic principles of banking to the international scene.[i] One was that the overall credit and debit accounts must be in balance. What has been deposited with the bank must equal the sum of the bank’s reserve plus its lending, a golden rule that was widely disregarded, incidentally, in the gadarene rush to lend money to the third world in the nineteen-seventies, with dire results, as it turned out, not for the lenders whose folly should have merited the heavier punishment, but for the borrowers. This balance in the clearing house was to be achieved automatically, through the device of the increasingly steep interest charges in bancors as nations entered into higher imbalances, of either deficit or surplus. The other principle was that the balance between inflation and deflation should be controlled through manipulation of the bank rate, and therefore the money supply.[ii] Keynes expected that the equilibrium that the scheme would introduce into the balance of payments accounts would, in any case, prevent much of the pronounced oscillation which is the bane of capitalist economies. But in so far as instabilities in monetary values did occur, they too would be automatically brought back into equilibrium through Keynes’s scheme. If the money value of the world’s trade rose, then the amount of bancors that could be borrowed would rise in line with it. But this would happen only gradually over a period of five years. Thus if there were a 20% rise in monetary value, and therefore an inflationary fall of 20% in purchasing power, debtor countries would only be able to borrow in any one year 4% more than they had previously. This would provide them with enough increased credit to tide them over immediate difficulties but also force them to adopt deflationary measures, as their own currency would be tied to the bancor. On the other hand, if a country entered a period of economic depression with an attendant fall in monetary values, its citizens would start buying less from abroad. As the country spent less bancors the surplus on its quota of bancors would rise and it would find itself facing increased interest charges in the clearing house. This would encourage governments to solve their problems not by imposing tariffs to protect home industries, as they had done in the thirties, but by expending their bancors, which, on best Adam Smith principles, would enrich their trading partners who would then become able to buy the recessed country’s goods, thereby bringing it out of its recession. Correspondingly, as a recessed country bought less of a trading partner’s goods that partner, reciprocally, would find its quota of bancors falling into deficit. The increased interest charges in the clearing house would encourage the partner country to devalue, thus making its goods more attractive in the recessed country, which would also, again in accordance with the classic doctrine of the mutual advantages of trade, help to bring that country out of recession. It was a scheme of extreme elegance produced by the greatest economic genius of that, and perhaps any other, age.
The Americans, led by Harry Dexter White, would have none of it. Even before the war America had already been a major creditor nation, exporting far more than she imported. With the war and lend lease that credit surplus had grown huge. They saw themselves as being unfairly penalized by Keynes’s proposals. Furthermore, they feared that peace would precipitate another major recession. The economic demands of the war had brought the American economy, which had been by far and away the biggest supplier of military goods, to new heights of productivity. If this were suddenly to cease they foresaw the effects as dire. The essential idea of the Stabilization Fund which they proposed, as an alternative to Keynes’s scheme, was that the shattered nations of Europe should get themselves back on their feet by borrowing heavily from the enormous American surplus, at very favourable rates. This would enable the European nations to rebuild themselves, maintain demand and keep the US economy at the centre of world trade. To this end they proposed the Stabilization Fund. All nations would contribute according to the size and strength of their economies. This meant, of course, that America would be by far the major contributor. Nations that got into balance of payments problems would be able to borrow from the fund on a short term basis to tide themselves over their difficulties. Thus the IMF was born. A second institution was also to be set up, an international bank with the purpose of lending money on a long term basis to underdeveloped countries which required investment. Thus was the World Bank conceived, and in this case too by far the biggest depositor of funds, which would then become available for borrowing from the bank, would be America. Under the American plan a nation which had accrued surplus trading revenues could have the corresponding balance of payments deficit paid off in gold. According to Dexter White this would be fair to everybody, as it meant that the accountancy of world trade would be in a neutral currency. “….There are deemed to be some national prestige values and possibly slight economic gains in trade and financial transactions that accrue to a country having a currency that is widely used as an international unit of account. For that reason a unit belonging to no country would be more welcome to most countries than the unit of any selected country”.[iii] It must be said that a cynic might have found this somewhat disingenuous. America had been stockpiling gold and at this time had 70% of the world’s whole supply. By garnering even more of what was proposed as the world’s ultimate measure of value, it would strengthen its fiscal power to an even greater degree. Moreover, the Americans insisted that the value of the dollar should be fixed in gold and all other currencies fixed in value against the dollar. This implied, however, that just as the value of the dollar might be said to be fixed in gold, so the value of gold might be said to be fixed in the dollar. In practice the dollar became the world’s reserve currency. This meant that the Americans were in a hugely advantageous position to manipulate world trade in their favour, by increasing or decreasing the supply of dollars. It also meant that their economy was not vulnerable to the vagaries of currency speculation in the way that those of other countries were. In an ominous tactic for the future, the Americans threatened to discontinue their war loans to Britain if the British Parliament did not accept the American proposals. The British had little option but to comply.
[i] D.E.. Moggridge 1992. Maynard Keynes: An Economist’s Biography. Ch. 26 “The Clearing Union”. P. 671. London. Routledge
[ii] Hawtrey op.cit. Pp28-29
[iii] Quoted by Rowbotham op.cit. P.43