At the time of the Bretton Woods meeting 50 years ago a Global Central Bank was proposed by the British representative John Maynard Keynes as a way of managing both capital flows and trade balances between countries. But the plan was soon lost in a sea of fractious national interests. It’s up for debate again and economist Jane D’Arista (left) has been one of its most persuasive advocates. She spoke to Wayne Ellwood from her home in Connecticut.
How much of your proposal for a global central bank, what you call an International Clearing Bank (ICB), is rooted in Keynes’s original vision from the 1940s?
The roots are there, definitely. If you study the Bretton Woods proposals you see that what got left out was the ‘clearing house’ idea and that’s what my proposal would reintroduce. An International Clearing Bank wouldn’t print its own currency but Keynes’s proposal didn’t endorse that either. Instead it would issue an ‘international reserve asset’. That would make it possible for countries to engage in trade and financial transactions in their own currencies. At the moment the US dollar is effectively used as the international reserve currency.
Why is that such a serious problem?
The dollar has become the main currency of the global economy. And that is fraught with danger. As the central trade currency the dollar helps reinforce a model of neocolonialism that’s already in place. Take debt for example. Nations create wealth internally but they have to service their external debts in another currency. That means relying on exports to bring in the foreign exchange necessary to service this debt. Which is why debt is such a burden in the global economy. An ICB would allow each country to pay for cross-border transactions in its own currency and so bar speculators from raiding the world’s currency reserves. People could then create wealth in their own currencies within their national economy and be able to have equality of interaction with the rest of the world.
What is it that makes this idea so appealing right now?
Export-led growth has come to dominate the global economy. Heavily indebted countries that can’t make payments in their own currencies – and that is the overwhelming majority – have no choice but to focus on exports. Even if they’re successful and build their foreign-exchange reserves they often exhaust them defending their currency against speculators.
Countries have national central banks like the Federal Reserve in the US or the Bundesbank in Germany. Would the ICB function in a similar way?
It would be in charge of a payments system like a national central bank but it would be a way of clearing transactions between countries. I’ll give you an example. Let’s say I buy your magazine and send you a cheque in US dollars. You would take my cheque and deposit it in your corner bank which would in turn pass the cheque on to your national central bank.
Your local bank would receive in payment for the cheque an addition to its ‘reserve account’ at your central bank. That would allow it to create a deposit for you in your currency, Canadian dollars.
OK, I’d have received a US dollar cheque and I’d get paid in Canadian dollars. I’m happy. Now my national central bank has an addition on both sides of its balance sheet. It has liability to my corner bank in terms of increased reserves but it’s also got this US dollar cheque. Is this where the central ‘clearing house’ comes in?
Yes, your national central bank would then take the US dollar cheque to the International Clearing Bank which would maintain a balance sheet of assets and liabilities for every country. In payment it would receive a credit to its international reserve account at the ICB. So on its balance sheet your national central bank now has more reserves at the International Clearing Bank. The ICB then returns that cheque to the US central bank (the Federal Reserve) and accepts payment for it by deducting from the Fed’s international reserve account at the ICB. At that point the Federal Reserve takes the cheque back to my corner bank where it’s paid for by deducting from my bank’s reserve account with the Fed. My bank then cancels the cheque and returns it to me.
It sounds complicated but plausible. Like a giant system of pluses and minuses moving up to the top and back down again. But is it politically feasible?
Not everyone likes this idea, especially the US financial sector whose institutions are the main beneficiaries of the current global system. The whole point is to put the global payments system back in the hands of public institutions, to cut out the international banks and powerful speculators who’ve been in charge of foreign-currency markets. It’s a lucrative game and fortunes have been made. But money games don’t do much to promote trade or facilitate long-term investments. Foreign-exchange investment is axiomatically short term. That instability is part of the current system which is so wrong and so devastating for so many countries. A stable regime of currency relations is the key to reversing the downward spiral of lower wages and the export of goods and capital on ruinous terms.
You’ve also mentioned the ICB acting as a ‘lender of last resort’. How would that differ from the current role of the IMF?
The problem with the IMF is that it finances bailouts with taxpayer funds. The ICB could fight balance-of-payments problems in several ways. One would be to enforce Keynes’s very strong belief that countries with surplus reserves also have a responsibility to revalue their currency. It’s not just a question of the weak to the wall. Let’s assume that ICB members agreed that a month should pass before reviewing trade imbalances. That’s fine. At the end of the month, if my reserves are five-per-cent less than yours and yours are five-per-cent higher than they were before, then we need to revalue and change the currencies. This one month, given that the values of currencies now are shifting on a second-by-second basis, gives the export sectors of all countries a breathing space. They don’t have to have such large derivatives contracts and futures contracts on currencies.
On the other hand, let’s say after the recent earthquake in Taiwan the country had to make a lot of payments to buy relief supplies which resulted in an enormous trade imbalance and foreign reserves were draining away. ICB members could say: ‘Let’s make an adjustment but let’s not devalue Taiwan’s currency so it has to pay even more for imports.’ Instead the ICB could buy from Taiwan’s National Central Bank more government securities which would allow it to increase the country’s international ‘reserve account’. The exchange rate could remain the same, thus not adding financial chaos to natural disaster.
Ultimately, as a lender of last resort the ICB could come to Taiwan and buy from its citizens’ holdings of Taiwanese Government debt which would be paid for through the Taiwanese Central Bank by an addition to its international ‘reserve account’.
What about the issue of global ‘governance’? How would an International Clearing Bank be run? And by whom?
The world economy has been run by oligarchs. So how do you make the system more democratic? My thought is that population as well as economic output would determine the voting power of nations participating in an ICB. There would be a rotating Governing Board composed of representatives from countries that together make up 60 per cent of the global wealth and 60 per cent of the global population. To guard against the ICB becoming a clubhouse for creditors or élites, member central banks would be required to demonstrate genuine accountability to citizens in their own countries. The ICB itself would adhere to tough disclosure and reporting standards. It would have offices in every major financial centre and there would be advisory boards from citizens movements and other interest groups outside the financial and government sectors.
The global money managers, the IMF, central bankers and others have put all their faith in market solutions. How do you penetrate that ideology?
Selling an idea like this is politically difficult, even among non-governmental organizations. But I believe things are changing slowly and a fundamental questioning of the current model is now taking place. There are chinks in the armor and we have to be ready to exploit them and explain our vision of what could be different.
In the five years I’ve been talking to NGOs about this there’s been a growing awareness that the private international financial system is the pivotal point. It’s that which is driving national governments which are in turn driving the Bretton Woods institutions.
As the world becomes more interdependent the systemic crisis and contagion could actually impact the G7 countries. It’s getting closer. As the public begins to realize that the people running the global economy represent a narrow élite, pressure for change will grow.*Jane d’Arista*
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