From Keynes’ Clearing Union to the Euro-zone and the Renminbi

The 1944 Bretton Woods agreement provided an international imprimatur 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 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 freely. 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 later developments. 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. A monetary truce, proposed by Mundell, would have included 1) agreement by Europe and the US on an inflation level, and for US monetary policy to target that level; and 2) Europeans adjust their gold-to-dollar ratios to maintain the US gold stock. 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 deindustrialization and financial fragility, ongoing consequences of the dollar standard. And exchange rate depreciation has done little to correct account imbalances. Clearing Union concepts help to understand the euro experiment – when it nearly failed, and how it recovered. An international currency can succeed only if 1) surplus and creditor countries are both required to adjust; and 2) member countries agree on inflation objectives. Demands on China to revalue have been misguided. From the perspective of 2022, correction of account imbalances will not happen without the approval of the world’s now largest creditor – China – which is likely to resist any constrain on its actions. This is and will be a drag on the world economy.