A Blueprint for Reform of the International Monetary System (2)

Jan Kregel

I am excited by Jan Kregel's proposal to create a clearing house or settlement system for world trade and payments! His proposal is for me a stimulus to explore again the possibility to set up a G24 for changing the world by focusing on this specific proposal (in my post of August 11, 2014, I suggested to form a new G24 "to change the world").

Over the past months I have discussed the idea of a new G24 with members of a larger group of 40 international experts in international finance (Fondad G40), for whom I organise a regular exchange of articles and draft papers via email. Even though I received interesting suggestions about how such a G24 could be organised, I put the initiative on hold until I would come across a stimulating proposal that might unite experts.  

Jan Kregel says in his paper, "Emerging Markets and the International Financial Architecture: A Blueprint for Reform", that Keynes'proposal for the postwar international system sought to remedy some of the same problems emerging economies are facing currently.

By eliminating national currency payments for imports and exports and setting up a clearinghouse, a mechanism would be created that settles "a balance between imports and exports over time, with any divergence from balance providing automatic financing of the debit countries by the creditor countries via a global clearinghouse automatically. Countries would receive credits or debits in a notional unit of account fixed to national currency. "

Since the notional unit of account could not be traded, bought, or sold, it would not be an international reserve currency. In Kregel's view, a global or regional clearinghouse would be a much more promising avenue for reform of the international monetary system than expanding the use of the SDR.

Kregel says that Keynes' Clearing Union is also a more realistic blueprint for reform of the international financial architecture than other proposals. And, with regard to developing countries, it "could address emerging market grievances more effectively than current approaches".

Jane D'arista

Why do I think Jan Kregel's proposal might win the hearts of, hopefully, 24 members of the Fondad G40 (and/or others)? Because some other members of the G40 have proposed exactly the same. For example, Jane D'Arista (she is a member of the G40) did so already many, many years ago. She repeated and refined her proposal in more recent years. You may like to read, for instance, her paper "The Role of the International Monetary System in Financialization" (especially pp 17-22, where she discusses the creation of a multilateral, international payments system), and "A More Balanced International Monetary System" (especially, pp 137-140).

Duisenberg: "The situation will become unbearable both for the United States and for the world"

Wim F. Duisenberg (1935-2005) was the first president of the ECB (1998-2003)
copyright David van Dijk

The temporary effect of the way in which both dollar crises were resolved was a restoration of confidence in the US dollar, even though the US debt would rise even further as a result. The solution to the 1971 US debt crisis created a 'dollar-overhang' – too many dollars circulating outside the United States. The 1979 solution produced the reverse – too many dollars going to the United States, largely invested in US Treasury bills. 

Will there be another US debt crisis because of the rapidly growing US government debt? In this regard, Dutch central banker Duisenberg said, 'The situation we find ourselves in now, will, in the long run, become unbearable both for the United States and for the world.'

Triffin found that more European central bankers were thinking like Duisenberg: 'Not so long ago I spoke to one of them and he agreed that it is absurd and untenable that the United States sucks in hundreds of billions of dollars from the rest of the world.' The former Bundesbank president, Emminger, who had dismissed at the beginning of the 1960s, Triffin's reform plans was now on Triffin's side. In his “The Dollar’s Borrowed Strength,” Emminger writes: 

'The present payments imbalance (the wealthiest country in the world borrowing abroad on an unprecedented scale) and exchange rate distortions (the high dollar) are not sustainable forever. However, nobody can predict when the inevitable turnaround will come .... Nor is it as yet foreseeable whether it will be forced upon the United States from abroad – e.g.  by a decline of confidence on the part of foreign investors – or whether the United States will itself be lowering its need for foreign funds – e.g. by cutting its budget deficit [author's emphasis].'

When the next US debt crisis emerges, the interesting question will be what response is chosen. The two preceding crises demonstrated the paradoxical power of the United States; the largest debtor of the world made its creditors – the rest of the world – see a stake in keeping it going and helping it incur an ever higher debt.

[excerpts from "The International Monetary Crunch: Crisis or Scandal?", Alternatives, July 1987.]

Duisenberg: "That's why we, presidents of central banks all over the world have been shouting, 'America, get your own house in order!'"

Wim F. Duisenberg (1935-2005) was the first president of the ECB (1998-2003).
copyright David van Dijk

"Can one accuse the Unites States of making developing countries pay for its arms build-up? Initially Duisenberg does not want to answer the question. Then he starts laughing and says: 'It won't be the first time they let other countries pay for their arms expenditures. The war in Vietnam was in fact not financed by the United States either, but by other countries.'

How is it that the United States has shifted its military expenditures to other countries? 'In short', Duisenberg replies, 'this amazing fact is the result of the privileged financial position the United States has in the world.' (In the following pages the topic will be explored further.)

Normally a country which spent so much money on arms would have had to either cut its domestic expenditures drastically or borrow huge sums abroad. The United States, however, did not need to make this choice because of the international role of the US dollar. After the Second World War the US dollar became the key currency of the international financial system, and this placed the United States in a unique position. It could virtually spend as much as it wished as long as the rest of the world was willing to accept the dollar and attach a certain value to it. Over the past few decades the dollar's key role has not only given the United States extraordinary space for financial manoeuvring, but also has meant the extraordinary dependence of the world on US economic policy.

So far Duisenberg has tried to avoid a moral judgement. But at the end of his story he says what he really thinks of the behavior of the US government:

‘The United States has at once a very privileged and a very responsible position. A country which is conscious of that responsibility should not only look at the internal effects of its policy, but also look at the international repercussions. America produces tremendous shockwaves affecting the whole world—in both the industrialized and the developing countries – but continues to be strongly inwardlooking. That's why we, presidents of central banks all over the world have been shouting, 'America, get your own house in order!'  The situation we now find ourselves in is going to be unbearable, both for the United States and for the World.’"

[excerpts from "The International Monetary Crunch: Crisis or Scandal?", Alternatives, July 1987.]

Duisenberg and the International Monetary Scandal

Wim F. Duisenberg (1935-2005) was the first president of the ECB (1998-2003)
copyright David van Dijk

"During the 1960s, Duisenberg was a staff member of the International Monetary Fund in Washington. During the 1970s in the Netherlands, he was a professor of economics and a scrupulous minister of finance. Before becoming president of the central bank in 1982, he was director of one of Holland’s commercial banks [Rabobank]. When asked to give his version of the origins of the debt crisis, Duisenberg began with the same old story of the Arabs dramatically increasing oil prices in 1973. But this was a standard explanation [in those days… and still?]. I was interested in other stories with which Mr. Duisenberg must surely be familiar. Was he prepared to tell them? Yes, he was.  (…)

The second story Mr. Duisenberg relates is about how the richest country in the world has repeatedly made the world pay for its selfish financial policies and yet has received more financial aid from abroad over the past few years than any other country in the world. He says the situation we are in now is completely absurd. A sound situation would be that the rich countries lend or give money to the poor countries. There should be an export of capital in the form of loans and grants from the rich to the poor countries. But, surprisingly, the richest country in the world, the United States, actually imports capital from all over the world. In this sense the United States is being financed by the rest of the world, including the developing countries. (…)

Finally, when he is asked to comment on the view that the sudden booming of the US budget deficit is, above all, caused by the enormous American arms build-up, Duisenberg loosens up and begins calling a spade a spade. Here is what he said: ‘What the American government has done is implement a programme of tax reduction, which means less income for the government, while at the same time raising its expenditures, particularly in the military sector. Military expenditure increased in real terms by 7-8% a year. That's how the United States has acquired these tremendous budgetary deficits.’"

[excerpts from "The International Monetary Crunch: Crisis or Scandal?", Alternatives, July 1987.]

PS: Rearranging stuff in my room I found three 'old' pictures of Duisenberg and selected the one above. I interviewed Duisenberg twice, if I remember well, in 1978 and 1984. 

Keynes and International Monetary Reform

I inherited this book by Keynes from the father of my mother, and he may have inherited it (or not) from his father, who was the founder of economic geography in the Netherlands, and of the Journal for Economic Geography (Hendrik Blink, 1852-1932).

All the scientific books I inherited from my grandfather (Gerard Jan Blink, 1891-1971) have a bibliographic card inside, in his handwriting.

Before I will highlight some points in the paper by Jan Kregel I spoke about in my previous post, I'd like to highlight a few points in Keynes' Preface to "A tract on Monetary Reform".

"Unemployment, the precarious life of the worker, the disappointment of expectation, the sudden loss of savings, the excessive windfalls to individuals, the speculator, the profiteer -- all proceed, in large measure, from the instability of the standard of value."

"Nowhere do conservative notions consider themselves more in place than in currency ; yet nowhere is the need of innovation more urgent."

The full text of Keynes' preface is below.

A Blueprint for Reform of the International Monetary System (1)

I hesitated where to put this strange picture of Tropea in which my wife and me are inserted by coincidence (by having left a photo in the scanner when I scanned the painting by Aafke), in this blog or in my other blog, "Tutto e possibile".

I decided to put it here as I am thinking in English (and not Spanish, French or Italian which I do when writing on the other blog) reading at this moment a highly interesting paper Jan Kregel sent me, "Emerging Markets and the International Financial Architecture: A Blueprint for Reform".

I will let you know in a next post why I like this paper by Jan Kregel.

To this post I would only like to add that my search for ways to solve problems of the poorer part of the global community - which, unfortunately, is a large majority, whereas the decision makers among a small minority of rich people determines to a large extent their fate - and my thoughts about a better global financial system were stimulated in the 1970s and 1980s and afterwards by interviewing, in Spanish language, Latin American people: campesinos, social scientists, politicians.

Probably my ability to speak Spanish has been facilitated by having a grandmother from Naples whose first language was Italian (she spoke with the accent of Naples), and having a great-grandfather (the father of my nonna) who came from a small village nearby Tropea in Calabria (the far south of Italy).

Both my Italian grandmother and my mother (and my sister who lives in the south of France) have studied French. I learned it at school and, more than anything else, being in France and Marocco. And, for sure, by reading novels in French. I start the day by reading google news in French before I switch to other languages. 

The painting above was made by my wife, Aafke Steenhuis, on our first trip to Tropea. I inserted the picture after the coincidental inclusion in a slightly different way so that it nicely fitted with the cliff on which Tropea has been built.

Global financial experts must play music or understand French/Spanish

Former Dutch minister and jazz musician Hans Dijkstal

I put the previous post in Spanish translation on my blog "Tutto
è possibile" and received interesting comments.

One commentator, a professional translator from Spanish to English (he read my post in English and wrote to me in Spanish as that is the language of "Tutto è possbile") said:

"A friend of mine, a doctor specialised in food disasters, worked for 14 years with Doctors without Borders (Medecins sans Frontieres/Artsen zonder Grenzen). She said that in addition to English and one other European language, they required knowledge of one language from the Third World. She knew Swahili.

What I found at the time a silly requirement I understand today: knowledge of a language of the countries where she was going to work, even if it was only one of dozens, was a window into another perspective to see the world."

Another commentator, a pianist, said:

"I speak a universal language: music, directed, it seems, at the spirit, the soul. It's not sufficient for traveling around the world and, at age 57, I think I should learn English. I understand Catalan, but do not speak it, until now."

These two comments are a perfect starting point for what I'd like to explain. 

In my view, global finance experts are better equipped and more thoughtful experts if they understand French or Spanish as this gives them the possibility to open their mind to other perspectives. It may also contribute to enhancing their empathy, and looking at the world in a more modest, more curious, less arrogant manner.

Before I founded the Forum on Debt and Development, FONDAD, I worked with the Transnational Institute. The main language there was English, but a few of us spoke Spanish and French too. I remember how happy I was when I could speak Spanish or French with my colleagues as this was giving me and, I think, them a different view on things. It also stimulated me and them to talk about different topics. Finally, the speaking of Spanish or French opened our mind and spirit to other sentiments.

To finish this post, I will give you one other example of why the capacity of understanding French or Spanish is a useful (but not sufficient) condition for becoming a good expert in global finance. 

In the early 1980s I set up an informal discussion group consisting of global finance experts working with the commercial banks (Rabobank, ABN Amro, ING), the central bank, the major ministries dealing with the topic (Finance and Foreign Affairs - Development Cooperation), the parliament, and some media. 

In this discussion group I heard Treasury officials saying what I had heard before: policy makers south from Paris are not serious people, voicing rhetorical and radical ideas rather than the well-thought, balanced, down-to-earth, clear ideas of the northern Europeans (whose ideas, by the way, are not at all that well thought, balanced and clear -- but that's a topic for a next post). 

What I have noticed since I got involved with global finance as a journalist, researcher, conference organiser, international networker and global citizen, is that there is a difference between global finance experts who only speak English and those who speak at least one other "rhetorical" language.

Why do I include in the title of this post the playing of music as an alternative requirement for a global financial expert? Because I think the playing of an instrument may give the financial expert who only speaks English the sensitivity to better understand the world. The real world goes beyond global finance and needs inspiration from music. Isn't language also, in part, a form of music?