Bancor

[Bancor was proposed as an international money invented by Keynes post-WW2. This idea was not accepted / pursued in a conference called Bretton Woods, instead a dollar based system was envisaged, spurred by the US, which remains the system today].

BW [1] adopted a national currency as international money. Systematic balance of payments deficits for the country issuing the international money were an inevitable consequence of this arrangement. Those deficits became essential as a source of money supply for the rest of the world, and as a means to finance the expansion of international trade and investments. And, as Triffin has pointed out in formulating the dilemma that goes under his name, running deficits in the interest of growth can only jeopardize stability [..Triffin Dilemma mainly says a nation-state, the boss, issuing global currency lives in a dilemma, the rest of the world needs that currency, but the boss cannot do that without being in deficit, which might contradict with its internal politics]

According to a theory of international trade that goes back at least to David Hume, any disequilibrium is doomed to be reabsorbed by automatic adjustment mechanisms. In a system of freely fluctuating exchange rates, a trade surplus ought to determine an appreciation of the currency of the surplus country, thus reducing its competitiveness and contributing to rebalance its foreign trade. If a country throws sand in the mechanism, for example by piling up foreign exchange reserves in order to keep its exchange rate low, this will obviously hinder the correction and perpetuate the imbalance (at least until a rebalancing is achieved, more slowly and indirectly, by a greater inflation in the surplus country, or by a greater deflation in the deficit country, so as to eventually devalue the currency of the latter in real terms, if not in nominal terms). ...

A third reason for persistent imbalances is of a completely different nature, and has to do with the functioning of international capital markets as markets. The very fact that imbalances are funded by surplus countries at a cost, in the form of credits that have to be remunerated, puts the whole burden of adjustment on the shoulders of the deficit country, which is in most cases the weakest party and the least capable of bearing the weight. The relationship between creditor and debtor countries is greatly asymmetric: the debtor pays an interest on its debts, while the creditor earns a return on its investments; the debtor may be forced to borrow, while the creditor is never compelled to lend; the debtor faces a limit on the sustainability of its liabilities, while the creditor can go on indefinitely accumulating reserves and assets; the adjustment is more painful for the debtor, who is forced to enforce restrictive monetary and fiscal policies, than for the creditor, who is asked to adopt expansionary policies...

This claim is based on the fact that the international monetary system envisaged by Keynes, unlike the one that was established at BW, radically overturned the causes of structural imbalance outlined in the previous chapter. This stands out clearly from the distinctive features of the Clearing Union: an international unit of account, distinct from all national currencies; a symmetric distribution of the burden of readjustment between debtor and creditor countries; a criterion to detect chronic disequilibria and to correct exchange rates accordingly. Let us see what kind of international monetary architecture Keynes planned to build on these three pillars...

The Clearing Union was conceived as a bank with the task of financing temporary disequilibria in the balance of trade between countries. In this respect, it shared the same purpose of the IMF. Yet, unlike the IMF or an ordinary commercial bank, it would not grant credit on the basis of deposits or capital previously entrusted to it by its members. Member countries would not be required to commit any amount of money in any form to the Clearing Union. They would be simply assigned a current account denominated in a new, international unit of account called ‘bancor’. Not having deposited anything into its account, the initial balance of each country would be equal to zero. The par value of the currency of each member would be expressed in terms of bancor.

The Clearing Union would grant credit in the form of overdraft facilities. In other terms, each member would have the possibility of financing a trade deficit simply by entering a negative balance on its account. Symmetrically, a country with a trade surplus would have a positive balance credited to its account. Hence, for example, an export from country A to country B financed by the Clearing Union would give rise to the simultaneous registration of two entries of equal amount: a credit to the account of A and a debit to the account of B. Thanks to the centralization of all accounts at the Clearing Union, however, the credit and debit would not be bilateral, but multilateral positions, of each country vis‐à‐vis all the other members as a whole. In other terms, the surplus country A could spend its credit in bancor not only with B, but with any other member country; and B could reduce its debit by exporting towards any other country. In this way, the Clearing Union would be able, in principle, to finance international trade and its expansion, without the need of any given amount of money. ...

Bancor is not a fiat money. To be sure, it is created ex nihilo. And yet its creation does not depend on the decision of a central authority. The amount of bancor balances is not decided by the Clearing Union. Bancor can only be created in conjunction with the transfer of real goods from a surplus country to a deficit country. Moreover ... bancor does not only come from nothing, but it also goes back to nothing; it is not only created, but it is also destroyed, every time a transfer of goods occurs in the opposite direction, from a deficit to a surplus country.

[.. In this] international bank designed by Keynes, not only debtors would have to pay an interest on their debts, but also creditors would have to pay an interest on their credits ...

This might appear startling and vexatious towards creditors, since we are used to seeing them as virtuous savers that deserve to be rewarded. Yet, this is contrary to the logic of Keynes’s plan, and on strictly economic, not moral, grounds. First of all, the creditors within the Clearing Union have not deposited any money, and hence do not have to be compensated for not spending it. [..] But why do they have to pay? Because, indeed, they receive a benefit from the possibility of running credits with the Clearing Union that it is worth paying for. Just as the Clearing Union allows deficit countries to purchase goods that they otherwise would not have been able to afford, in exactly the same way and in the same measure it allows surplus countries to sell goods that they would have otherwise not have been able to sell...

Here comes into play the third distinctive feature of Keynes’s proposal: the correction of exchange rate misalignments. In case a country should have a systematic deficit (or surplus), its currency would be devalued (or revalued) accordingly, in order to increase (or reduce) its competitiveness and hence to restore the equilibrium of its foreign trade. The fact of restricting the possibility of devaluating to deficit countries is sufficient to rule out ‘competitive devaluations’, that is, the indiscriminate recourse to this sort of measure as a way to boost exports. In fact, the disequilibria that would justify such corrections would be clearly defined in terms of a certain proportion of the quota for a certain number of years...

A similar clearing system could be set up in Europe to face the current sovereign debt problems. As I have already observed, the whole debate concerning the so‐called ‘sovereign debts’ is biased by an obsessive concern for public debts, whereas the problem really concerns that part of public and private debts which is financed abroad. In other terms, the real problem of the euro today is the persistent disequilibrium in the balance of payments of participating countries. And the European monetary unification bears itself a responsibility for the buildup of such imbalances, since it has encouraged international capital movements to expand at bay from exchange risk, in fact inhibiting the correction of exchange rate misalignments.

Refs

[1] Fantacci, Why not bancor? Keynes’s currency plan as a solution to global imbalances, Link

[2] Graeber, Debt: The First 5000 Years