I have written about money woes issues separately in the past on a variety of venues, but consistently on Econintersect and Talk Markets. Let me now gather these thoughts together. A confluence of impelling crises requires this synthesis. Here I argue for the institution of a global currency – the Bancor – first proposed by John Maynard Keynes at Bretton Woods in 1944.
Introduction
First, we will give a look at the price that the United States pays by importing goods and exporting money. Then we will give a look at what to do if the Stock Market crashes. Finally, we will see how the creation of the Bancor throughout the world will solve not only the money crisis but even the military crisis in Ukraine.
Russia regretted her decision not to participate in the Bretton Woods Agreement that established the International Monetary Fund and the World Bank. Under the guidance of Mr. Putin, Russia today might not miss a second chance to become a full partner in international financial agreements.
Stalin might have ultimately been hampered from participating in the Bretton Woods Agreement by a churlish Marxist bias against money.
Mr. Putin seems to be free of such a bias. He clearly loves money for himself and his friends. But he should lose his Capitalist practice in favor of a Concordian practice that would extend the benefits of 1% Capitalism as practiced today to a 100% Capitalism.
Mr. Putin would thus help achieve 100% of the goals (but not the tools or the means) of Socialism/Marxism. Russian people, after all, have endured more than half a century of pain inflicted by a Communist Regime during the last century.
New Century, New Life.
How will public servants all over the world react to this proposal? The Bretton Woods Agreement was clearly a betrayal of Keynes’ intentions. Will we recover the Spirit of the Bancor by even improving upon Mr. Keynes’ own idea? The Bancor Mr. Keynes conceived was a means of account. We now have the opportunity to create the Bancor as a true international currency. Let us seize the moment.
What is the Price the United States Pays by Importing Goods and Exporting Money?
As pointed out elsewhere, there are two crucial issues in foreign trade. They have not been examined because they do not exist in modern economic theory. The concern is about hoarding and ownership of wealth. They are hidden in plain sight. Until they are settled, all conversations about foreign trade create heat but not much light.
Much of the conversation about foreign trade is concentrated on three controversial points: Who pays the tariffs? Who benefits from foreign trade imbalances? Who cheats?
The last question is most fascinating but least relevant.
Apart from concerns about hoarding and ownership, not much new can be added to the fourth traditional question, “Who benefits from foreign trade?” In ideal, textbook conditions, if two nations engage in trade, they both benefit. Empirically, it is even possible to determine whether both nations benefit equally.
Who Pays for the Tariffs?
It is the citizens of the nation that imposes tariffs who pay the tariffs. It is they who are penalized. The goods they buy are more expensive than they would otherwise be.
Who Benefits?
Who benefits from tariffs? Once one goes beyond the simple fact that the government that imposes tariffs benefits, at least in the short run, the answer is complicated.
If national producers of goods imported are capable of exploiting the rise in prices of foreign products and are capable of producing goods of the same quality as imported goods, that nation clearly benefits, because tariffs create income and growth opportunities for locals. Yet, there are qualifications. If newly employed resources could be more effectively engaged in producing different things, the advantage turns out to be illusory.
The damage inflicted upon the foreign country depends on the importance that foreign trade has in that nation. It also depends on their assumed inability to produce at lower cost, so to nullify the benefit to local nationals of the country imposing tariffs.
Long-Run Issues
Long-run consequences are hard to identify because they depend on sets of movable parts. If tariffs on our products are imposed in retaliation, who among our exporters is penalized? Do we grant an incentive to our foreign competitors to leap-frog current technology—so they might be encouraged to create entirely new technologies fit for the next stage of development?
Tariffs, in other words, can produce much churning within the two nations involved in trade. That is why wise economists have always opted for free trade: no tariffs; no trade wars.
The remaining issue then is: What are the effects of tariffs on the balance of payments?
Effects on the Balance of Payments
Effects of tariffs on the balance of payments can be positive or negative. The most interesting case to analyze is that of negative effects. This is because this effect immediately bifurcates—depending on the international status of currency used. To be specific, is the negative balance in “dollars”?
This is a crucial question. Most international trade is carried out in dollars. This is a huge issue. It has nothing to do with economic science; it is an issue of purely political and military power.
Crudely stated, when people of the world export their goods to the United States, the creator of dollars, countries of the world send us real goods produced by the sweat and tears of their workers—and the exhaustion of their natural resources.
We, in the United States, send them paper money and digital money.
This is a condition of enormous importance. It clearly explains the efforts of China trying to have their currency, the renminbi, accepted in international trade.
Two Crucial, Hidden Issues
There are two crucial issues that are absent from the current discussion on imbalances in foreign trade. Since we in the United States exchange paper and digital money for real goods, we are letting our negative balances grow so large that we periodically have to change the scale of our graphs to see those imbalances.
Who cares? Let them eat paper and digital money is the general posture. This is such a natural tendency; we are having such a free ride. Who would not exchange real goods for pieces of paper?
Hoarding of Money
Those who are concerned about outrageous imbalances in foreign trade instinctively know that there is something rotten in Denmark. Here is the rot: Hoarding of money in this country or, worse, abroad is extremely dangerous because its behavior is unpredictable. One thing is constant: It responds to the herd mentality. Once a leader sprouts, followers follow. Thus, it is just like in snow avalanches. The last flake of snow that changes into ice creates an imbalance that sends a mass of snow downhill.
Asset Ownership
The second effect is the issue of ownership. When Americans hear that the Rockefeller Plaza is in foreign hands, they gasp. Many other properties are in the hands of German, Japanese, and Chinese people. Even the Italians have acquired control of Chrysler.
That is the issue: control. Control over peoples’ lives—through control of their property. Control can take one hundred subtle forms that go much beyond the scope of this presentation. This effect ought to concern each one of us greatly.
The fear of God might finally enter our psyche if we will ever notice this possibility: Because of their relatively smaller military and political power, Chinese people are still reluctant to use their economic power. They are hoarding dollars and are the major buyers of American bonds. What happens the day in which they say, “Enough already; either you do such and such (about foreign trade, for instance) or we demand an immediate exchange of bonds for dollars and our dollars for real estate and capital goods.”
What to Do if the Stock Market Crashes?
As pointed out elsewhere, there are warnings on the airwaves about a collapse of the Stock Market almost any time in the immediate future.
What to do then?
There is a flip side to the set of considerations that I advanced a while ago around the fact that there is almost no real wealth at all behind the three trillion zeros accumulated in the Stock Market since the last election.
The flip side, the positive side, is this:
No real wealth will be destroyed, if the Stock Market crashes. And the issue is not if, but when the Stock Market crashes.
Individual Investors
When the stock market crashes is a question of great interest to individual players. Those who cash in in time will go home with a bundle.
Individual investors, who are determined to remain in the market until it might be too late, have some serious calculations to make: They have to determine what is the most they can lose without being utterly ruined.
Individual people can also find some sense of security if they—in time—make a run for gold. Since the price of gold has its own outstretched gyrations, what type of security is this? And there are more objections to this false solution:
- First, what security is obtained if all other people around us are ruined?
- Then, what type of security is there when coming out of the bunkers one finds the entire structure of production and organization of society destroyed?
The individual alone can at best save himself. Real security, long-term security, can be acquired only through the community as a whole. To adopt Benjamin Franklin’s warning:
“We must, indeed, all hang together or, most assuredly, we shall all hang separately.”
The Economic Community
There are two actions that the community, the community represented by—and led by—the Federal Reserve System (the Fed), can immediately take before the crash.
Fed Action #1
Quite apart from doing what it is planning to do with interest rates, the first, most urgent deliberation is to shut the lending door down. This would curtail all lending destined to purchase any form of financial assets.
This set of actions will not necessarily burst the bubble: The private money market might sustain the Stock Market to higher levels still. But with the Fed stopping any lending that is not devoted to the creation of real wealth, the Fed will only put a stop to the waste of public financial resources. The Fed will no longer tolerate unjustifiable exposure of public money to risk of failure.
Fed Action #2
The second immediate decision that the Fed must take is to make an announcement ahead of time. Namely, the moment the Stock Market crashes, the Fed will open the Discount Window to fund specific entities. These are
- individual entrepreneurs,
- cooperatives,
- corporations with ESOPs and/or CSOPs engaged in the production of real wealth, and
- public agencies with taxing power and shovel-ready infrastructure projects.
It will have to be clear that the Discount Window is open only to fund operations devoted to the creation of real wealth of table and chairs and services.
The Fed will issue such loans at cost.
The Fed can conceivably administer all these loans by itself. The better part of wisdom suggests a different solution: the Fed can issue these loans through the existing bank system. Surely the cost of the loan will increase to compensate the efforts of the local banks, but an enormous advantage would automatically arise. Local banks know local entrepreneurs. If we remember the wisdom of such fabulous bankers like J. P. Morgan, we will endorse such a solution. J.P. Morgan would look into the eye of the borrower to decide.
The Fed is legally empowered, today, to implement these measures, because these measures would undoubtedly sustain growing levels of employment and reduce the rate of deflation that eventually follows from a Stock Market crash.
Isolation of Speculators
Once national and international behemoths of finance collapse because of a crash in the Stock Market, if the proposed measures are in place, even the people in them will emerge unscathed. Being highly skilled technicians, they will be coveted employees of entities that devote energies to the creation of real wealth.
They might themselves bring to life projects they had dreamed to start and were incongruously thwarted from carrying them out while working within the current organization of the market.
Some of these financiers, having adequate financial resources, might even opt to retire.
Undoubtedly, pursuing any of these solutions will do much to reduce the harm caused by a crash in the Stock Market.
The Fed can, therefore, oversee the working out of the rules of the market with great poise and equanimity. If the market makes the behemoths of finance crash, it is because they are not viable business enterprises, they are not sustainable. To resuscitate them by injecting into them inordinate sums of either taxpayers’ money or bank depositors’ money, as we have repeatedly done in the past, is a supreme act of legalized thievery whereby money is transferred from the many to the few. For what purpose? To let the behemoths of finance create more illusory wealth, more zeros? And then eventually see them crash again to the ground under unsustainable burdens of debt?
We have repeatedly done that in the past and we have reaped not too many advantages. The overall economic condition of the world, beyond the glitter dispersed by the glitterati, has been covered with incredible levels of blood, sweat, and tears for the many. As Einstein warned us, to take the same action over and over again, and expect different results, is insanity.
Past Insanity
We have repeatedly money from the many to the few in the past, because, with the collapse of the behemoths traditional channels of credit were frozen. That meant activities in the business world were subsequently frozen. This is a condition that the state cannot tolerate for long. But all this insanity was justified under the regimen of mainstream economics.
The ultimate gift of Concordian economics is precisely that. The gift to humankind is to free ourselves of the vile (remember Adam Smith?) strictures of the past. Rather than passing our national credit through the “primary dealers,” the behemoths of finance, we can use viable channels of credit by creating a direct link from the Fed to the local banks and local business operators. Let fear disappear from the market; allow sanity to reassert itself; let the free market rule.
Petitions
The Fed surely prefers to have the authorization to perform the proposed new functions by more people than a few of us. All are welcome to join in. After all, that was the original intent of the two petitions posted on the Internet:
- The first petition is to MEND THE FED (do not attempt to End the Fed; if you destroy it, you have to rebuild it).
- The second petition is to DEFUSE THE BOMB of the next financial collapse by implementing a systematic Mosaic Debt Jubilee.
To defuse the bomb of the next financial crash, we ought to be brave. As recently suggested, creditors ought to become alive to the ancient wisdom of the Israelites. Every seven years they canceled all unpayable debts. Unpayable debts create only tragedies. To wipe the slate clean and start anew is to show great faith in the creative abilities of free people. Everyone benefits.
Do study these petitions. If you agree with their spirit sign them; encourage your friends to study and to sign them. Above all, do participate in the political discourse of the moment by getting away from titillating gossip (remember Brandeis?) and concentrating the mind on essential social, economic, and political issues. As suggested by the Fed in a personal communication, we ought to encourage “our state and federal representatives” to write the proposed rules into the law of the land.
The Splendor of the Bancor as International Currency
As suggested elsewhere, in 1944, Keynes came to the Bretton Woods Conference to present his idea of the Bancor. This was a unit of account to be created by an International Authority to keep foreign exchange accounts always balanced so that trade could prosper among nations.
The co-convenor of the Conference, Harry Dexter White, had no ear for the Bancor. He was interested only in establishing the Dollar as the international reserve currency, a proposal that he was certain would be acceptable to the US Congress.
The idea of the Bancor has been kept in subdued conversation among economists. Until now. Currently, that idea appears to be the core of a proposal that is presumed to be shortly implemented in a few days by the International Monetary Fund.
The plan is to use the IMF’s “Special Drawing Rights” as a new “global reserve currency.”
This plan is a perversion of Keynes’ thought about the Bancor (and especially a perversion of the function of the international agency that eventually ended up being called the International Monetary Fund).
The Bancor was supposed to be a unit of account, with no implicit exchange value.
How to Set Things Right
With three clarifications, the spirit of the Bancor may be revivified:
- First, taking a leaf from experience rather than abstract theory, as it was finally incorporated into the IMF’s “Special Drawing Rights” the Bancor would indeed have exchange value, a value ultimately determined by international financial markets.
- The second clarification is creation of the Bancor by each national Central Bank, resulting in the American Bancor, the Swiss Bancor, the Chinese Bancor, etc. Let us temporarily call it the xBancor. Today’s computers’ power will easily let us ascertain the value of each Bancor at each moment in time.
- Finally, the third clarification is most important. Distribute each national Bancor in accordance with three rules developed within the context of Concordian monetary policy.
The Bancor should be issued as a loan:
- only to create real wealth of tables and chairs, not to purchase financial instruments
- To individual entrepreneurs, cooperatives, corporations with ESOPs and/or CSOPs in their constitutions, and public agencies with taxing power so that the loan can be repaid
- At cost.
When Should the xBancor Be Created?
The xBancor should be created as soon as possible; as soon as a national—and international—discussion occurs to gain acceptance of this financial instrument. But not later than a few hours after the next financial crash occurs.
What Value Should Be Assigned to the xBancor?
Each xBancor should be created at par value with each existing national currency: thus, 1 US Bancor = $1.00; 1 Swiss Bancor = 1 Swiss Franc; 1 Chinese Bancor = 1 renminbi.
Yes, the value of each Bancor would be allowed to fluctuate as the value of today’s currencies fluctuates.
Yes, we would then have a world currency—but it would be wholly controlled by each national government.
What Is the Role of the IMF or the World Bank in a Bancor Regimen?
The Role of the IMF or the World Bank in a Bancor regimen remains precisely as it is today. Indeed, if the IMF should feel the need to use its privilege to create Special Drawing Rights, it could continue to do so. It would appear that there would be no need to even change the name of its financial operations. The IMF would continue to create SDRs. There might not even be the need to call these financial instruments IMF Bancors or any other such denomination.
What Are the Benefits of Creating Bancors?
To penetrate the value of creating a Bancor regimen we have to determine the timing of its creation. The major distinction is creation before the next Stock Market crash or after the Stock Market crash:
- Before the crash. Creating the Bancor regimen before the crash allows ample opportunity to fully explain and to plan ahead each and every detail of this regimen; ample opportunity to avoid potential pitfalls; ample opportunity to debate pros and cons.
- After the crash. Creating the Bancor regimen soon after the crash, avoids the catastrophic collapse of the value of, likely, all national currencies—as well as the collapse of the value of all financial instruments.
Short-term Effects
Short-term effects are rather easily determined. The opening of the national credit flow to satisfy the needs of the agricultural, commercial, and industrial world implies that, establishing the Bancor regimen in a truly timely fashion, a collapse of the financial world will not affect the world of the real economy one iota.
Another Great Depression will be avoided. And this disaster is avoided without shifting the burden onto exhausted taxpayers and/or unexpectant bank depositors. Or more simply, but perhaps more insidiously, without shifting the burden on the over-inflated accounts of Central Banks.
Unless a Debt Jubilee is proclaimed in accordance with Moses’ injunctions, the least damage that we are inflicting upon the real economy by overburdening the accounts of Central Banks is an opportunity cost. We have no appetite; we have no resources for maintaining our public infrastructure in order. The United States of America is fast plunging the maintenance of its public infrastructure to a level that used to be the shame of developing countries.
Effects on Individuals
The collapse of the financial world will, of course, have some major implications for both the workers within that world and the stockholders and bondholders depending on that world. These are people who might see the value of their portfolios reduced even to zero. Provided their portfolio is diversified, financial ruination will not totally engulf them.
People who will lose their jobs will have the opportunity to make one of at least three choices: They might choose to retire prematurely; they might start the business operation of their dreams; or they might find employment with local banks expecting to prosper under a Bancor regimen.
Long-term Effects
The long-term effects of a Bancor regimen are much more difficult to pinpoint. Because the creation of Bancors is determined in accordance with firm needs of the people requesting Bancor-denominated loans, the overall economy is set on a steady course.
Given that the distribution of Bancors is determined in accordance with the value people contribute to the creation of wealth, the overall economy is set on a just course.
Since it is set on a steady and just base, the overall economy is on a lasting course.
Conclusion
The overall assessment of creating and distributing Bancors following rules determined within the context of Concordian monetary policy is this: We shall pass from a world in which money controls people to a world in which people control money.
Let a Concordian Bancor regimen come: The sooner the better. Let the collapse of the modern financial world come: The sooner the better.
We are tired of waiting for a just and steady world of economic affairs.
A brand-new opportunity. A new expectation. If we pursue these inquiries into implementation, we will see whether the creation of the Bancor throughout the world can resolve not only the current international money instability, but even the military crisis in Ukraine.
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