Introduction
In 1944, delegates from the most influential nations met at Mount Washington Hotel, New Hampshire, Bretton Woods in a conference later called the ‘Bretton Woods Conference’, to discuss their vision for rebuilding the world economy after the ravaging war. John Maynard Keynes, perhaps the biggest economist celebrity of his time, attended the conference with his own idea of how the post-war economy should shape up. Unfortunately for him, and perhaps for us all, his ideas were overruled in favor of American treasury secretary, Harry Dexter White’s plan, and was lost in the annals of history, before seeing renewed resurgence in the context of contemporary instabilities in the international monetary system, forcing a rethink of what was lost in the conference years ago.

The Bretton Woods Conference was a defining event in world history, as it established the monetary system that we see today. Dollar hegemony and its status as a reserve currency has been called an ‘exorbitant privilege’, against which there have been voices time and again, but never has the wave been as strong as today. From a concern by economists, such as Triffin, Monbiot, Skidelsky, the overreaching impact of the economic recession of the late 2000s has led to significant doubts about the current system for policymakers and national leaders. In 2008, Monbiot recalled Keynes while analysing the financial instability of 2008, “John Maynard Keynes had the answer to the crisis we’re now facing; but it was blocked and then forgotten”. Skidelsky talks about reforming the ‘non-system’ by focusing on Keynes’ Clearing Union proposals and suggests that it is desirable to shift towards SDRs or a similar basket of currencies to replace the existing system of reserve currency. In 2009, Zhou Xiaochuan, the governor of People’s Bank of China, voiced his strong views in favour of moving away from the dollar and again recalling Keynes’ idea for Bancor. More recently, policymakers from France, Russia and China have called for a change in the international monetary system and the establishment of a different reserve currency. Important to note is also the fact that over the past decade, dollar representation in foreign exchange reserves has gone down from 71% in 2001 to 61% in 2013. All these factors hint at the instability the international monetary system is undergoing. With this paper, we intend to understand the Keynesian proposal in the historical backdrop, and analyse the feasibility and need for a similar system today, evaluating a contemporary application to Keynes’ theories in the modern context.

Keynes , Clearing Union and Bancor
Origin

The white paper on International Clearing Union (ICU) written by John Maynard Keynes, also knows as Lord Keynes or 1st Baron Keynes, was released as a white paper by the British government in April 1943 titles as “Proposals for an International Clearing Union”

At the beginning of the paper we came across the following

“The particular proposal set forth below lay no claim to originality. They are an attempt to reduce to practical shape certain general ideas belonging to the contemporary climate of economic opinion, which have been given publicity in recent months by writers of several different nationalities”1 (Reference: IMF docs)
This piqued our interest as to identify the writers Keynes referred to, as it would help us better understand the origins of this idea. Our research on this topic led us to work of H.D. White, National Clearing Fund proposal of E.F.Schumacher and the ‘ New plan’ by Dr. Hjalmar Schacht and the ‘New order’ Dr. Walter Funk
Basis our research, we think that the ‘New Order’ plan played a significant part in the development of Keynes proposal.
The ‘New plan’ as conceived by Dr. Schacht was the summarization of exchange controls established by Germany with its trading partners. In 1932 Germany has entered into multiple bilateral clearing agreements that with its trading partner countries2 (Reference : 9 Child (1958, p.38)
However, this model led to bilaterally unsettled balances and clearing of these balances presented a challenge. The ‘New order’ plan suggested by Dr. Funk in July of 1940 offered a solution to this problem. The key points were * Reischmark will be the international currency in Germany controlled geography * Reischmark will be stabilized against gold or US Dollar * National currencies will remain and will be stablised w.r.t. Reischmark * Berlin would be the central clearing house for Europan payments
Thus the ‘ New order’ plan led to creation of a multilateral clearing system. 3 (Reference : Einzich (1941, p.2))
The ‘New order ‘ was seen as the first practical plan post the postwar monetary and economic order. 4 (van Dormael (1978, p.5))
Concerned by the growing acceptance and influence of the‘New Order plan’, in November of 1940, H. Nicolson – the then Minister of Information in British Government, requested Keynes to critically review the german proposal and requested him to prepare a counterproposal. Keynes replied to this request:
In my opinion about three-quarters of passages quoted from the German broadcasts would be quite excellent if the name of Great Britain were substituted for German or the Axis, as the case may be. If Funk's plan is taken at its face value, it is excellent and just what we ourselves ought to be thinking of doing.(ibid., p.2)
In December of 1940, Keynes circulated a memorandum titled ‘ Proposal to Counter the German “New Order”. In the memorandum, Keynes says In the memorandum he says : "After the last war laissez-faire in foreign exchange led to chaos. Tariffs offers no escape from this. But in Germany Schacht and Funk were by force o f necessity to evolve something better. In practice they have used their new system to the detriment of their neighbours. But the underlying idea is sound and good" (ibid., p.8-9)
The above-mentioned quotes clearly shows that Keynes was impressed by the underlying idea of the proposal made by Dr. Schacht and Dr. Funk. He also realized that this idea could be of utmost importance in creating a postwar globally accepted monetary system. Keynes draft of International Clearing Union also seems to be reflect the same.

Keynes plan & International Clearing Union

Two years before the Bretton Woods Conference was mooted, Keynes had begun seriously considering a new system of trade accountancy and new international institutions; aware that trade would be a key post-war issue. In a comment that harked back to the currency speculation of the 1930s and which is remarkably prescient of today’s global market where destabilizing, speculative monetary exchanges outweigh trading in goods and services by 20 to 1, Keynes stated:
“Let no one suppose, however, that we for our part intend to return to the chaos of the old world. To do so would be to bankrupt us no less than the others... We intend to develop a system of international exchange in which the trading of goods and services will be the central feature. Financial and capital transactions will play their proper auxiliary role of facilitating trade.”
A 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.
Keynes was aware of the destabilizing macroeconomic effects of such imbalance of trade. Debtor nations found their domestic industry and agriculture seriously depressed, not only by the loss of home markets, but also by the drain of money abroad. These combined to produce a tendency towards recession and low investment. Meanwhile, creditor nations experienced both a boost in demand and a monetary influx. The growth and investment this promoted made them seek export markets with even greater vigour.
This meant that imbalances in trade tended to become self-perpetuating and compounding in effect. Keynes argues that it was fundamental to a constructive framework of international trade that there be a mechanism to ensure a balance of trade between nations – or more accurately, to ensure that imbalances were redressed. The tendency of trade imbalances to become permanent and compounding had to be countered.
Keynes ‘Clearing Union’ was an attempt to construct a machinery that took account of all the potential disturbances and difficulties of international trade. Acknowledging the need for a system of multilateral trade rather than bilateral nation-by-nation accountancy, the Clearing Union sought to foster trade balances by a range of fiscal mechanisms.
Keynes proposed a new, neutral unit of international currency – the ‘Bancor’, and a new institution – the International Clearing or Currency Union (I.C.U.). All international trade would be measured in Bancors. Exporting would accrue Bancors, while importing would expend them. Nations were expected to maintain, within a small percentage, a zero account with the I.C.U. 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. In the words of Geoffrey Crowther, former editor of The Economist:
“Debtor and Creditor should be treated almost alike as disturbers of equilibrium.”
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 were 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.
In the white paper ‘Proposals for an International Clearing Union’ , dated April 1943, Keynes mentioned that concern of postwar relief and reconstruction would be of utmost importance for all countries . He mentioned that to address these concerns four main lines of approach can be taken : 1. The mechanism of currency and exchange; 2. The framework of a commercial policy regulating the conditions for the exchange of goods, tariffs, preferences, subsidies, import regulations and the like; 3. The orderly conduct of production, distribution and price of primary products so as to protect both producers and consumers from the loss and risk for which the extravagant fluctuations of market conditions have been responsible in recent times; 4. Investment aid, both medium and long term, for the countries whose economic development needs assistance from outside.

However, he concluded that the most important of these approaches would be the mechanism of currency and exchange. He justifies his choice by saying

‘It appears on the whole convenient to give it priority, because some general conclusions have to be reached under this head before much progress can be made with the other topics’
Keynes also mentioned that the for the proposed plan of ICU to be successful and durable, it should satisfy the following criterion: 1. It should have least possible interference with internal policies of any country and the plan should be in line with the international terrain. 2. The technique of the plan should be such that it could be applied to any country, irrespective of the type and principle of government and type of existing economic policies 3. Management of the institution, ICU, should be truly international, rights of smaller countries should be safeguarded and enforcement/veto power shouldn’t be applicable to a country or a group. 4. Voluntary agreements/treaties on the ‘right to act as pleasure’ among the member states/countries, along with provision to void the obligation, as arising due to the proposal, with due notice. 5. Plan should work to provide general as well as individual advantage of the participating member states/countries and doesn’t require any special sacrifices from any country/member state.

As a suggested institution ‘International Clearing Union’ was the manifestation of these idea. The ICU would be capable to lend directly to the central bank (CB) of the member countries. It working principle were same as ‘Banking Principles’ – with Reserves and loans given to CB as assets and CB’s deposits as liabilities. Bancor – term introduced by Keynes in the first draft of the proposal published in February in 1932, was an international currency to be used by ICU for all its transactions.

Bretton Woods Conference
The 1944 Bretton Woods Conference gave rise to the two institutions that have dominated Third World development over the last 50 years. The World Bank was intended to aid post-war reconstruction, especially in poorer countries, by providing them with loans for development. The International Monetary Fund came into existence a year later, in 1945. Its purpose was to provide an international reserve of money – a financial pool – upon which all member countries could call, whether rich or poor, should they hit temporary payment difficulties due to a deficit in their trade accounts.
At the conference, during the months building up to it and for many years after, there were profound disagreements over the financial architecture established at Bretton Woods. Some of the disputes were over relatively minor matters such as the size of each countries monetary quota, ranking, voting rights and where the offices of the IMF and World Bank were to be situated. The deeper disagreements involved the actual structure of the new institutions, their purpose and powers, the future framework of monetary exchanges and landing – indeed the entire nature of international trade.
The most salient dispute concerned the key issue of the balance of trade between nations’ sustained trade imbalances leading to ‘creditor’ and ‘debtor’ countries had been recognised as a major cause of inter-war trading/financial chaos. The issue of the balance of trade was highlighted by the contrast between the two main schemes under consideration at the conference.
In the months leading up to the conference, the two major world powers, America and Britain, each tabled proposals suggesting a framework for international trade. These proposals were fundamentally different in character. They were based upon different priorities and with totally opposing views of the purpose of international trade and how this purpose might best be fostered. The British prepared a proposal, largely the work of John Maynard Keynes, for a system of trade accountancy, which Keynes called the ‘International Clearing Union’. The American plan, drawn up by a number of U.S. Treasury officials including Secretary Henry J. Morgenthau and championed by Harry Dexter White, was for an ‘International Stabilization Fund’. The American proposal and the economic priorities that underpinned it are reflected in the two institutions we have today – the IMF and the World Bank. In short, the American delegation won the day.

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[ 1 ]. http://www.monbiot.com/2008/11/18/clearing-up-this-mess/
[ 2 ]. http://www.skidelskyr.com/site/article/keynes-global-imbalances-and-international-monetary-reform-today/
[ 3 ]. http://www.bis.org/review/r090402c.pdf
[ 4 ]. http://www.imf.org/external/np/sta/cofer/eng/cofer.pdf