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The double-whammy section recalls the problem that Keynes was trying to solve with his International Clearing Union at Bretton Woods. To wit, he designed a system of global trade among nations that encouraged countries to seek a neutral balance of payments.
The International Clearing Union (ICU) would be a global bank whose job would be to regulate trade between nations. The ICU would make all international trade be done in its own currency called a bancor. The bancor would have a fixed exchange rate with other national currencies, and would be used to measure the balance of trade between nations. Every good exported would add bancors to a countries account, every good imported would subtract them. Each nation would then be given large incentives to keep their bancor balance within a very close percentage to zero. If a nation had too high a bancor surplus the ICU would take a percentage of that surplus and put it into the Clearing Union's Reserve Fund. This taking of surplus bancors would encourage nations with surpluses to buy other nations exports, so they maintain a zero trade sum. Nations that imported more than they exported would have their currency deflated to encourage other nations to buy their products, and make imports more expensive.
Would this have been a workable alternative to the way the European Monetary Union was designed and implemented?

"It's the statue, man, The Statue."
by Carrie (migeru at eurotrib dot com) on Wed Jan 31st, 2007 at 10:50:53 AM EST
It's an interesting idea, as is usually the case with Keynes, but I'm generally opposed to fixed exchange rates, as least for developed economies.  It sounds like a lot of headache that is not needed.  There is, remember, already an (economic) incentive for countries like China to not peg their currencies and run large current-accounts surpluses.  (I throw the "(economic)" in there because of the fact that many believe China has a political interest in the low yuan.  I'd worry more about the budget deficit than the trade deficit, in America's case, on that, though.)  By doing so, they artificially hold down the purchasing power of their citizens, while propping up that of their trading partners. They also expose themselves to the risk of losing money when (say) the dollar does finally come down to the market level.

Be nice to America. Or we'll bring democracy to your country.
by Drew J Jones (pedobear@pennstatefootball.com) on Thu Feb 1st, 2007 at 10:26:18 AM EST
[ Parent ]
when (say) the dollar does finally come down to the market level.
Isn't the dollar at market level by definition, in this world of freely floating exchange rates?  or do you mean specifically versus the yuan?  and if the latter, and the chinese floated, I think the yuan would become stronger versus all curriencies, not just the dollar, wouldn't it?
by wchurchill on Thu Feb 1st, 2007 at 07:13:46 PM EST
[ Parent ]

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