THE 'INTERNATIONAL CLEARING UNION' AND THE 'INTERNATIONAL STABILISATION FUND'
The first draft of Keynes's proposal for an International Clearing Union came in two papers written in September 1941 - 'Post War Currency Policy' and 'Proposals for an International Currency Union.' Skidelsky describes it as a marriage of 'the Schacht-Funk "clearing" approach with the banking principle.'
Where there was a trade imbalance, the credit due to the exporting country could, up to a certain limit, be paid by the Clearing Bank in the form of bank money, later called 'bancor', which could only be given to the country's central bank. The limit was imposed by an overdraft facility, or quota, 'equal to half the average value of the country's total trade for the five last pre-war years.' (Skidelsky's account is on pp.206-7. In trying to summarise it I'm taking a risk and the keen reader may want to consult the original.) The total overdraft facility for all countries concerned came to something like $25 bn. A debtor country whose overdraft averaged more than a quarter of its allowed quota would be allowed to devalue its currency by up to 5%; if it was more than half it could be required to do so as well as to sell to the bank any free gold, and prohibit capital exports. Beyond that limit it might be expelled. But, and this is crucial, a similar discipline was imposed on creditor countries, requiring an upward revaluation of their currency and eventually 'credit balances exceeding quotas at the end of the year would be confiscated and transferred to the Reserve Fund.' Interest was to be charged not just on the debtor 'overdrafts' but also on the creditor surpluses. Ideally 'at the end of the year the sum of bancor balances would be exactly zero' which, if I've understood it aright, would amount to a multilateral barter system.
National currencies would stand in a 'fixed but adjustable relation to a unit of ICB's bank money, which itself was expressed in terms of a unit of gold. But this link with the gold standard was a fiction. Whereas bank money could be bought with gold, it could not be sold for gold ... Keynes's long-run purpose was to de-monetise gold so that central banks would lose any incentive to hoard it. (21) Bank money would be the ultimate reserve asset of the system.' Keynes represented his scheme as an alternative, indeed as the only possible alternative to Schachtianism but we might be reminded of what was said above in Iwamoto's account of Funk's New Order: 'Dr. Funk insisted that this currency scheme would be entirely divorced from gold and adopted from the doctrine of nominalism by Knapp who said that “the currency does not depend for its value upon its gold cover, but on the value which the State gives it"'.
(21) The policy pursued through the 1930s by both the US and France.
Keynes first saw White's proposals in July 1942 and White first saw Keynes's proposals in August. A 'Joint Statement by Experts on the Establishment of an International Monetary Fund' was issued in Washington and London in April 1944, opening the way for the Bretton Woods conference in July. Between those two dates there were lengthy discussions about the details of the two plans, involving other countries, most notably Canada but also including the 'governments in exile' of countries still under German occupation. So far as I can see the result of those discussions was a steady whittling away of everything that was interesting and distinctive in Keynes's plan and an acceptance - including by Keynes himself - of something very nearly resembling the original proposal from White with its two institutions, a World Bank and an International Stabilisation Fund.
Most obviously gone was Keynes's proposal that there should be a single reserve currency, the bancor, which could only be used for international trade and which was not gold based. Keynes, as we have seen, had wanted a 'one way convertibility'. Bancor could be given in exchange for gold but gold could not be given in exchange for the bancor. The bancor itself was a pure fiat currency. Countries would have access to it, not on the basis of contributions of their own, but of a calculation of their pre-war trade capacity. Keynes's long term ambition was that the purely paper bancor would replace gold as the principle reserve. Keynes fought for the bancor to the end, at least in a new form given by White, the unitas. To quote a history of the IMF: (22)
'One apparently fundamental difference between the two countries’ officials concerned the proposed international currency, called by Keynes “bancor” and by White “unitas.” It has been seen above that for Keynes this would have been a true medium of exchange, in which loans would have been made by the Clearing Union, but that for White it was no more than a standard of value, which could be discarded without impairing in any way the working of the Stabilization Fund.
'At the outset of the discussions in Washington, Keynes put forward a memorandum in which he sought to imbue unitas with the qualities which he had proposed for bancor. His motives for this proposal were complex; they included ... (3) the advantage that the holder of unitas could utilize the credit anywhere rather than having a claim against an individual country, and (4) a belief that the structure of the Fund could be more simply and understandably stated in terms of unitas than of a “mixed bag” of currencies ...
'Keynes’ proposal was resisted by the U.S. officials, who suggested that the British, “unable to secure the redistribution of real gold, proposed to create a substitute out of thin air.” ... While not admitting the third and fourth points, they countered that the effect of Keynes’ proposal would be the same as that of the Clearing Union itself, namely, to expand the U.S. commitment beyond its contribution.'
(22) The International Monetary Fund 1945-1965 : Twenty Years of International Monetary Cooperation Volume I: Chronicle, Chapter 1: The Keynes and White Plans (1941–42), a book available on the IMF website, ascribed to the IMF as author. It can be downloaded in book form. Had I done so (I read it online) I could have given page references. But life is too short.
Keynes had argued in favour of a single specialist currency against the 'mixed bag' of currencies which required a complicated process of juggling the claims all the different currencies might have on each other. It is difficult to believe that he didn't recognise that the aim the Americans were working towards - certainly the main consequence of the final outcome - was that there would be a single currency - the dollar, backed by gold. (23) Keynes's bancor would, of course, have been independent of the dollar.
(23) Hence this extraordinary passage in Skidelsky's account of the Bretton Woods agreement (p.352): 'A little noticed amendment to Article IV (section 1) laid down that the par values of currencies should be expressed in terms of gold "or in terms of the US dollar of the weight and fineness in effect on 1 July 1944." This made the dollar, the only gold-convertible currency, the key currency of the new system. While every other currency could devalue against the dollar, the US dollar could be devalued only against gold.' (my emphasis - PB). Did Keynes really fail to notice the importance of this?
Basic to Keynes's conception was that creditors would be disciplined as well as debtors and that the disciplinary process would be, so to speak, automatic. The consequences of excessive debits or excessive surpluses and the conditions under which loans would be given would be known and would be purely quantitative, activated when the debt or surplus reached a certain level. His discipline was a matter of automatically allowing or requiring the exchange value of the national currency to be changed. Basically he wanted to preserve the greatest possible autonomy for the national economies to pursue policies that would favour full employment. White on the other hand was concerned chiefly with the disciplining of debtor countries in such a way as to ensure that they could pay their debts. In addition to the quantitative conditions for giving loans, there would be qualitative conditions, concerning the proper use of the money that was to be issued. The Fund was to be furnished with a team of specialists charged with developing policies for the internal reorganisation of the economy in difficulty. And everything was calculated to put obstacles in the way of changing the value of the currency.
A British Treasury spokesman, Sir David Waley, complained:
'We lose part of our freedom to alter the exchange rate and thus to some extent our internal policy for maintaining maximum production and full employment may be prejudiced by our obligations under the scheme. In return we, so long as the Fund thinks we are behaving reasonably [nb - PB], obtain a credit in dollars or other needed currencies, until these currencies become “scarce.” Thus we cannot count for certain on any precise amount of facilities and have given up part of our birthright for a mess of pottage which is likely to disappear from the menu just when our appetite is keenest.'
He goes on, however, to explain why the British accepted it. It should be said that once the idea of the bancor had been dropped it was really obvious that, despite the 'mixed bag' of currencies the scheme would be dependent on the dollar and the good will of the Americans:
'But, despite these inevitable limitations, the Stabilization Fund scheme is surely far better than no scheme at all.… The Stabilization Fund scheme provides Member States with considerable reserves and thus does a good deal, at any rate, to facilitate a policy of expansion when that policy is needed to avoid a slump.' (24)
(24) ibid.
When the British agreed to the Joint Statement issued in April it was understood that there would be a 'transitional period' during which the conditions embodied in the statement - including 'the proposal to fix the gold value of sterling and to limit the United Kingdom's right to change this value' would not apply, and that 'the United Kingdom would not commit itself to accept the Fund until it saw how the difficulties of the transition period were to be met.'. Recommending the Joint Statement in the House of Lords Keynes (he had been made 'Baron Keynes of Tilton' in 1942), cited the transitional phase as one of its merits. Somewhat bizarrely (still quoting the IMF history) he said that 'the Fund would have the duty to approve changes in exchange rates that were required to make these rates conform to the needs of domestic policies' and that 'these proposals are the exact opposite of the gold standard.'
Skidelsky comments (p.336):
'He seemed to advocate the monetary plan as a way of maintaining the sterling area and imperial preference system, whereas the Americans all too clearly wanted to dismantle both. He claimed Britain's right to determine its own exchange rate, when the Americans wanted a fixed exchange rate system. When told in Washington a little later that his line of defence had greatly embarrassed White and others, Keynes replied that it had been the only way to save the Fund from political extinction at Westminster ...'
After quoting Roy Harrod representing Bretton Woods as a triumph for Keynes's 'new economic theory', Skidelsky concludes more realistically (p.357):
'Keynes gave the Bretton Woods Agreement its distinction not its substance. The Agreement reflected the views of the American, not the British, Treasury, of White not Keynes. The British contribution tended, finally, towards the negotiation of derogations, postponements and escape clauses. The Agreement was shaped not by Keynes's 'General Theory' but by the US desire for an updated gold standard as a means of liberalising trade. If there was an underlying ideology, it was Morgenthau's determination to concentrate financial power in Washington. As the 'Commercial and Financial Chronicle' pointed out "The delegates did not reach an 'agreement'. They merely signed a paper which looked like an agreement." There was a transition period of indeterminate length.'
I started work on this essay with the aim of setting the scene for the account of post-war developments based on the analysis by Joseph Halevi. I had thought that the initial framework for the post-war developments had been established at Bretton Woods. In fact, however, although the institutions of the World Bank and International Monetary Fund did indeed come into existence through Bretton Woods, it was only later that their pernicious influence began to be felt. In the event the plans laid by Roosevelt, Morgenthau and White were, temporarily, swept aside by a radical change in the direction of American policy which occurred around 1947. That will be discussed in the next article in this series.