The economic shape of the modern world was decided at a meeting of British and American treasury officials, at a conference in a small American town in New Hampshire, called Bretton Woods, in 1944. Out of this meeting were born the three institutions that have provided the framework for international trade ever since: the World Bank, the International Monetary Fund and the General Agreement on Trade and Tariffs, now metamorphosed into the World Trade Organization. The American proposal of an International Stabilization Fund, the putative parent from which these institutions took flesh, was not, however, the only idea on offer at Bretton Woods. An alternative scheme was put forward by John Maynard Keynes. His ideas are presented with extreme clarity in Michael Rowbotham’s book Goodbye America! [i] Keynes had long meditated on the reasons for the great slump of the nineteen thirties. He had come to the conclusion that the underlying cause had been imbalances of trade between nations. If a nation had a balance of payments deficit it could only rectify that imbalance by selling more goods and buying fewer. That meant by definition that its trading partners must themselves enter into deficit. But if this didn’t happen the deficit nation could only meet its shortfall by borrowing. It was already in the position of buying too much from abroad. This meant its domestic industries were already depressed, having failed to compete with their foreign competitors for the home market. Now it was faced with meeting interest payments on its debt. This meant that a proportion of profit from what it did sell abroad would not go towards rectifying its current account balance but to the creditor nation. But the creditor was already in surplus. The interest payments would increase that surplus and lead to higher levels of investment. To prevent over-production and the slump that would follow, the creditor would be driven to sell abroad even more aggressively, if necessary drastically undercutting the producers of the debtor nation in order to seize an even higher share of its market. This would make the debtor’s balance of payments even worse and force its home industries into recession. As its problems increased it would be less and less able to buy the creditor country’s goods, and that country too would be forced into recession, hence the slump of the nineteen thirties. The debtor’s only recourse therefore was to borrow even more with the consequence it would have to pay even more in interest rates with the consequence that……….This is exactly what has happened in the case of third world debt.
Keynes set himself to solve this conundrum without falling back on the protectionist policies which the industrial countries had adopted in the thirties, with the result that what had been a balance of payments problem had turned into a global catastrophe, stultifying trade and leading to the whole world system grinding to a halt. [ii] Keynes’s answer was what he called the Clearing Union. This would be a clearing house through which all international trading accounts would have to pass. Its essential principle was that a penalty would be exacted not only from nations that ran a persistent deficit but also from nations that ran a persistent surplus. The bearer of the surplus would have to spend that surplus on buying goods from the bearer of the deficit, thus bringing that nation back into surplus and itself entering into the deficit position. The current accounts of all nations would oscillate about an equilibrium in a reciprocating relationship, thus avoiding permanent balance of payments difficulties.[iii] The clearing house would have its own currency, called by Keynes the bancor, which trading nations would use to settle accounts with each other. All international trade would be measured in bancors. Each nation would start with a quota of bancors, assessed in accordance with its volume of trade over the previous five years. Exporting would accrue bancors, importing would spend them. Within a small percentage all nations would be expected to maintain a zero account with the clearing house, thus indicating that their balance of payments was in equilibrium. Each nation’s bancor account would be related to its currency through a fixed, but adjustable, exchange rate. Nations that imported more than they exported would pay a small charge to the clearing union on their current account. This would encourage deficit nations to devalue their currency and take other measures to encourage exports. Equally, nations that exported more than they imported would also be charged. This would encourage them to import more and find ways to spend their surplus bancors with debtor nations, otherwise they would gradually lose their surplus in interest payments to the clearing house.
Michael Rowbotham 2000. Goodbye America!. Charlbury, Oxfordshire, England 7 Sydney, Australia. Jon Carpenter. See also the author’s The Grip Of Death for a radical analysis of contemporary economics.
[ii] See Van Dormael 1978. Bretton Woods: Birth Of A Monetary System. London. Macmillan
[iii] R.G. Hawtrey 1946. Bretton Woods: For Better Or Worse. London. Longman