Keynes’ Clearing Union, the Dollar Standard, and the Perils of Globalization

Abstract

The 1944 Bretton Woods agreement provided an international green light for the dollar standard.  H. D. White, the lead US negotiator, saw to it that the ability of other countries to obtain commitments from the US (via the soon-to-be International Monetary Fund) for loans or approval for currency devaluations would be limited.  J. M. Keynes, representing Britain, in contrast proposed an International Clearing Union that would issue its own currency (“bancor”), intended to reduce systemic dependence on the dollar or on gold.  The ICU would be a bank for the world’s central banks, which would allow debtor nations to borrow.  In contrast to White’s plan, ICU creditors would be expected to reduce their balances by expanding domestic credit or other means.  Insights from Keynes’ plan help to understand subsequent monetary history.  An ICU premise was that international reserves should be pooled, and centralized.  The Bretton Woods gold-dollar standard was jeopardized during the 1960s – the Triffin dilemma -- when European creditor countries demanded gold reserves from the US.  An intermediate-run monetary truce, proposed by R. Mundell, would have included joint US-European action to agree on a US inflation target and to adjust gold-to-dollar ratios in European reserves.  Monetary cooperation could thereby have created de facto international reserves. Instead, the Bretton Woods exchange rate apparatus collapsed by 1973, leaving major currencies to float.  Against expectation, international demand for reserves soared.  Relentless demand for US securities has contributed to soaring debt and malign distributional consequences.  And exchange rate depreciation has done little to correct account imbalances.  Clearing Union concepts help to understand the euro experiment – why it nearly failed, and how it recovered.  An international currency can succeed only if 1) both creditor and surplus countries are required to adjust; and 2) member countries agree on inflation targets. Demands on China to revalue have been misguided.  From the perspective of 2026, correction of account imbalances will not happen without the assent of the world’s now largest creditor, – China – which for domestic political reasons is likely to resist.  Perils of globalization under the existing dollar standard are likely to continue.