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Independent Green Voice

How Keynes' Bancor International Trade Currency would
Work to Encourage International Trade Balances

In his book, Goodbye America! Globalisation, Debt and the Dollar Empire, Michael Rowbotham raised for consideration, Keynes', ultimately unsuccessful, proposal for an "International Clearing Union" and a "Bancor" international trade currency -- intended to foster international trade balances.
As he wrote in pages 37-39 of Goodbye America:

Fundamental to Keynes' thinking was the importance of fostering a balance of trade between nations and avoiding the scenario in which some nations become 'creditors' and others 'debtors' through their trade accounts. Creditor nations were those who had exported more than they imported and thereby ended up with surplus revenues from an imbalance of trade. Debtor nations were those whose imports had exceeded their exports, and so suffered a monetary loss through trading -- a trade deficit…

Keynes proposed a new, neutral unit of international currency -- the 'Bancor' -- and a new institution -- the International Clearing or Currency Union (ICU). All international trade would be measured in Bancors. Exporting would accrue Bancors, importing would expend Bancors. Nations were expected to maintain, within a small percentage, a zero account with the ICU. This would indicate that they had an overall equivalence of imports and exports.

Each nation's Bancor account would also be related to its currency through a fixed, but adjustable, exchange rate.

The key feature of Keynes proposal was that it placed an equal obligation on creditor and debtor nations to maintain a balance of trade…

Nations that imported more than they exported -- debtor nations -- would pay a small interest charge to the Clearing Union on their overdrawn account. This would encourage those nations to promote exports by a range of domestic policies as well as marginal currency devaluation. Equally, nations that ran an aggressive trade policy and exported more than they imported would also be charged by the Clearing Union for their surplus account. This would encourage those nations to find ways to spend their excess Bancors back in debtor nations -- or gradually lose that surplus.

The efforts of debtor nations to promote exports was intended to coincide with the efforts of creditor nations to expend their otherwise worthless Bancor surplus. These charges were intended not so much as a deterrent or punishment, but as a benign 'feedback' mechanism, ensuring that, over time, trade remained in balance.

Why Stabilised Currency Values are Essential
to Ensure Equity in Global Trade

by Michael Rowbotham, originally published in Prosperity, October 2001

Every bit as important as Keynes' ideas for financially balanced trade were his ideas for stabilising currency values. Stabilised currency values are essential to ensure equity and stability in global trade.

If the Third World had their debts cancelled and had balanced trade from now on, yet found that its goods were to be exported for a fraction of their value, and imports were to cost many times what they should, then they would still be held in thrall.

It is their grossly devalued currencies that are responsible for the terrible 'terms of trade' they endure.

The key to Keynes' proposal for currency stabilisation was that currencies should be aligned and valued according to a basket of commodities. He suggested wheat, oil, copper etc.

With today's sophisticated trading data we could, literally, have a register of all globally traded commodities used to determine and review currency values.

Aligning currencies according to commodity prices in this way, was a key element of Keynes' proposal.

Today, wheat grown in one country may, due to a devalued currency, cost a fraction of wheat grown in another.

This leads to the country in which wheat is cheaper becoming a heavy exporter -- regardless of need, or the capacity to produce better quality wheat in other locations.

In addition, currency values can change dramatically and the situation can reverse. Critically, such wheat 'prices' bear no relation to genuine comparative advantage of climate, soil type, geography and even less to indigenous/local/regional needs.

Neither does it have any stabilising element that would promote a long-term stability of production with relation to need.

Following Keynes' ideas, then, the price of wheat in country A and country B (and all countries) would be related via the agreed (fluctuating, but not wildly) currency level.

Since many, or all, commodities would be employed in determining the actual level of each nations currency, the market price of wheat would, in fact, vary from country to country -- but not probably by the wild disparity today, that leads to global exchange of goods that could be grown more locally and regionally.

This would allow a more stable geography of production and consumption to emerge.

This is a profound and democratic idea.

Keynes did not expand upon it much because in those days there were not the wild devaluations in currency that makes a mockery of today's global economy.

However, by imputing value to a nation's produce, and allowing this to determine the value of a nation's currency, one is imputing value to its resources, its labourers and acknowledging its own needs.

This is an indispensable aspect of Keynes Clearing Union and vital to any future sustainable and just world economy.

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