The International Clearing Union: 80 years on

Keynes’ maiden speech to the House of Lords took place during this week in 1943, when he endorsed recently published plans for the post-war monetary system

We set up a universal money; we make sure that its quantity shall be adequate; we share it out between the countries of the world in equitable amounts; we take what precaution we can against improvidence on the one hand and hoarding on the other. It is obvious that in this way we establish an immensely strong influence to expand the trade and wealth of the world, and to remove certain disastrous causes of inhibition and distress.

Exactly 80 years ago, having recently been anointed Baron Keynes of Tilton, Keynes made his maiden speech at the House of Lords. The occasion coincided with the publication of plans for the postwar monetary order developed independently in the United States and United Kingdom—more commonly known as the White Plan and the Keynes Plan, respectively.

The speech provides a non-technical introduction to Keynes’ Plan—a plan that was ultimately overlooked in favour of White’s.

The contents of the speech repays study—while we might contemplate how far we remain from Keynes’ vision today still.

Keynes’ speech

Keynes began by explaining that they had decided to publish the papers to secure the “consciousness of consent” required of the democratic process.

International monetary arrangements were only one aspects of the post-war economic problem. The plan did not deal with the matter of post-war reconstruction, for example. Instead, the International Clearing Union was concerned with the settlement of international balances and provision of liquidity after the war.

The “principal object” of the international clearing union, Keynes went on, “can be explained in a single sentence: to provide that money earned by selling goods to one country can be spent on purchasing the products of any other country. In jargon, a system of multilateral clearing.”

This would eliminate the need for bilateral clearing between countries, one potential arrangement for the post-war world. Instead, exports to any country could be used for imports from any other.

But if such a system withstood the test of transition to a new world of multilateral exchange, then it could be made a permanent fixture where the supply of this global money could be “proportioned to the scale of the international trade which it has to carry; and, also, that every country in the world should stand possessed of a reasonable share of that currency proportioned to its needs.”

This would not mean completely displacing gold from her traditional role—or demonetising gold—in settling international transactions. But the new money should not be freely transferable into gold otherwise it would require gold backing and “we should be back where we were.”

Should the new currency be called dolphin?

What shall we call the new money? Bancor? Unitas? Both of them in my opinion are rotten bad names but we racked our brains without success to find a better. A lover of compromise would suggest unitor, I suppose. Some of your Lordships are masters of language. I hope some noble Lord will have a better inspiration. What would your Lordships say to dolphin? A dolphin swims, like trade, from shore to shore. But the handsome beast, I am afraid, also goes up and down, fluctuates, and that is not at all what we require. … I fancy that our Prime Minister and President Roosevelt could between them do better than most of us at this game, as at most other games, if they had the time to turn their minds to writing a new dictionary as well as a new geography.

As to the distribution of this new currency, each country would get an initial reserve,  “a once-for-all endowment.” But Keynes noted this is only a liquidity facility, and is not a permanent arrangement for countries to live beyond their income.

What happens if a country runs short of Bancor? This would be a delicate matter “for it may seem to involve interference with a country's domestic policy.” The solution he had found was to rely on “consultation and advice” [but] “the country may be required to take certain specific measures” to resolve balance of payments difficulties.

Ultimately, in a final resort, the international community could deprive the country of any more liquidity support.

Crucially, Keynes notes that the resources provided should be large enough not to encourage use but to “relieve anxiety and the deflationary pressure which results from anxiety.”

Symmetry

At this point in the speech Keynes turns to the symmetry of the scheme, and the need for creditors to spend their income rather than withdraw demand from the global economy:

…the world's trading difficulties in the past have not always been due to the improvidence of debtor countries. They may be caused in a most acute form if a creditor country is constantly withdrawing international money from circulation and hoarding it, instead of putting it back again into circulation, thus refusing to spend its income from abroad either on goods for home consumption or on investment overseas. We have lately come to understand more clearly than before how employment and the creation of new incomes out of new production can only be maintained through the expenditure on goods and services of the income previously earned. This is equally true of home trade and of foreign trade. A foreign country equally can be the ultimate cause of unemployment by hoarding beyond the reasonable requirements of precaution. Our plan, therefore, must address itself to this problem also—and it is an even more delicate task since a creditor country is likely to be even more unwilling than a debtor country to suffer gladly outside interference or advice. In attempting to tackle this problem the British plan breaks new ground. Perhaps its approach may be open to criticism for being too tentative and mild; but this, I am afraid, may be inevitable until these things are better understood.

And this is where he drew inspiration from the “experience of domestic banking.”

If an individual hoards his income, not in the shape of gold coins in his pockets or in his safe, but by keeping a bank deposit, this bank deposit is not withdrawn from circulation but provides his banker with the means of making loans to those who need them. Thus every act of hoarding, if it takes this form, itself provides the offsetting facilities for some other party, so that production and trade can continue.

In this way, Keynes tried to introduce the banking principle to the global provision and distribution of liquidity and demand.

Eventually, he noted, a country might reach their “permitted maximum” debit against the rest of the system. But in the meantime the hoarding, or creditor, country would be exposed as a drag on global demand and “will be under every motive of reason and of benevolence and of self-interest to take corrective measures.”

What happens to gold?

But would this involve a return to the rigidity of the gold standard?

Absolutely not, “I hope your Lordships will believe me when I say that there are few people less likely than I not to be on the look out against this danger.” Keynes made clear that countries can only maintain a rigid external standard if the domestic cost base moves in line with others. But with policies directed towards domestic goals, this is not something that they could guarantee. Instead, currencies would be allowed to adjust. But only if external conditions indicated such an adjustment was needed, and only then, beyond a certain point, “by agreement.”

Finally, the plan did not insist on capital controls; but each country would be allowed to choose their own path. The only condition is freedom of current transactions.

For the UK, Keynes envisaged capital controls would be necessary in the post-war period, otherwise they would lose control of interest rates. And low interest on gilts would be a necessary part of the post-war management of debt as it was during the war. In other words, financial repression was needed to bring down domestic debt. But other countries could decide for themselves how to manage transactions on capital account.

What about creditor countries?

Finally, Keynes tried to assure the Americans they would not be turned into a “milch cow:”

The essence of it is that if a country has a balance in its favour which it does not choose to use in buying goods or services or making overseas investment, this balance shall remain available to the Union—not permanently, but only for just so long as the country owning it chooses to leave it unemployed. That is not a burden on the creditor country. It is an extra facility to it, for it allows it to carry on its trade with the rest of the world unimpeded, whenever a time lag between earning and spending happens to suit its own convenience.

A man does not refuse to keep a banking account because his deposits will be employed by the banker to make advances to another person, provided always that he knows that his deposit is liquid, and that he can spend it himself whenever he wants to do so. Nor does he regard himself as a dispenser of charity whenever, to suit his own convenience, he refrains from drawing on his own bank balance. The United States of America, in my humble judgment, will have no excessive balance with the Clearing Union unless she has failed to solve her own problems by other means, and in this event the facilities of the Clearing Union will give her time to find other means, and meanwhile to carry on her export trade unhindered.

Keynes saw only two circumstances when the US would build excess Bancor balances. The first would be if they allowed for the emergence of unemployment and idle resources at home (i.e., a collapse in domestic demand and imports.) The second would be if the US lacked in ingenuity to invest her surplus resources abroad. But:

Why should our American friends start off by assuming so disastrous a breakdown of the economy of the United States? 

In concluding, Keynes would not be drawn to comment in detail on the alternative proposals of the United States, but “the whole world owes to Mr. Morgenthau and his chief assistant, Dr. Harry White, a deep debt of gratitude for the initiative which they have taken… It may be said with justice that the United States Treasury has tried to pour its new wine into what looks like an old bottle, whereas our bottle and its label are as contemporary as the contents; but the new wine is there all the same.”

80 years on

Of course, we did not get Keynes’ Plan.

The joint statement one year later and subsequent Bretton Woods agreement in the summer of 1944 largely endorsed the White Plan—which rejected the banking principle in favour of a subscription-based model, and which was therefore less elastic and more tied to the fate of gold and the US dollar.

With hindsight, we now know that the United States would indeed prove to be an engine of global demand in the postwar period—and was likewise willing to provide outward investment on a scale sufficient to allow for the reallocation of gold back to Europe and Japan. Were Keynes’ Bancor plan agreed, then credit balances would have been contained, as he thought they would be. There was no “milch cow.”

We also know that the system closely tied to gold could not last.

And despite the creation of the SDR, the global monetary system has never been elastic enough to expand liquidity in line with trade in goods and services—let alone the growth of gross financial claims—without creating imbalances.

Countries today still cannot rely on the steady accretion of reserves by a centralised body, but must instead generate current account surpluses or recycle capital inflows to sustain greater integration into the global economy.

Moreover, this century has seen large and persistent surpluses emerge in Germany and China that continuously force painful adjustment onto counterpart deficit countries.

That is, there remains no mechanism for generating endogenous expansion of domestic demand by creditor countries.

And so, 80 years on from Keynes’ maiden speech to the House of Lords, many of his ideas and concerns remain as relevant as ever. There is still much to inspire from the debates back then.

What we cannot replicate is the clarity and urgency of language Keynes employed; not least since:

So ill did we fare in the years between the two wars for lack of such an instrument of international government as this that the resulting waste and dissipation of wealth was scarcely less than the economic cost of the wars themselves; whilst the frustration of men's efforts and the distortion of their life pattern have played no small part in preparing the soiled atmosphere in which the Nazis could thrive…. The Treasuries of our two great nations have come before the world in these two Papers with a common purpose and with high hopes of a common plan. Here is a field where mere sound thinking may do something useful to ease the material burdens of the children of men.

Keynes’ maiden speech at the House of Lords can be read here.

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