Home > Uncategorized > An international financial architecture system to deal with persistent trade imbalances and any international financial crisis

An international financial architecture system to deal with persistent trade imbalances and any international financial crisis

from Paul Davidson

An international financial architecture system to deal with persistent trade imbalances and any international financial crisis can be developed to operate under the same economic principles laid down by Keynes at Bretton Woods. But this system does not require the establishment of a supranational central bank of the world as Keynes suggested in his “Keynes Plan” at Bretton Woods. Instead, this new international payment system is aimed at obtaining a more acceptable international agreement (given today’s political climate in most nations) that does not require any nation to surrender the nation’s control of either its domestic banking system or the operation of its domestic monetary and fiscal policies to a supranational authority. Each nation will still be able to use monetary and fiscal policies to determine the domestic economic destiny that is best for its citizens as long as it does not detrimentally affect employment and income earning opportunities in other trading partner nations.

What is required is a closed, double-entry bookkeeping clearing institution to keep the international payments “score” among the various trading nations plus some mutually agreed upon rules to solve the problems of persistent trade and international payment imbalances. It will also require an international agreement and a method to prevent international financial market transactions that can cause a financial market crisis that would be disruptive to the stability of any nation’s economy as well as a threat to the global economy.  

The new international institution to be set up under this plan could be labeled the International Monetary Clearing Union (IMCU). The IMCU would require all international payments between nations whether for imports or financial funds crossing national borders to go through this International Monetary Clearing Union. Each nation’s central bank will set up a deposit account with Ideas towards a new international financial architecture? 162 the IMCU. Then any payments of a resident entity in nation A made to a resident entity in nation B will have to clear through each nation central bank deposit at the IMCU. A payment from a resident in A to a resident in B when cleared through the IMCU would appear as a credit for nation’s B central bank account at the IMCU and as debit to nation’s A central bank’s account at the IMCU. Although this may seem to be a complicated process to the average layperson, it is merely an international version of how checks are cleared when a residents of one region of the United States, say California, pays other entities in another region, say New York. The checks clear thru the clearing house mechanism set up by the United States Federal Reserve. System

This IMCU is a 21st century variant of the Keynes Plan. To operate it would require at least seven technical proposals for dealing with all types of international financial problems that we have already indicated may occur. These technical proposals are presented in the Appendix to this chapter. At this point, rather than letting the exposition getting bogged down in technical details, it is more appropriate to indicate how and why this IMCU proposal works to end the possibility of persistent trade imbalances and, disruptive flows of financial funds across national borders. Simultaneously this IMCU would be encouraging global full employment and economic growth.

The object of this International Monetary Clearing Union is:

(1) to prevent a lack of global effective market demand for the products of industry occurring due to liquidity problems whenever any nation(s) holds either excessive idle foreign reserves by saving (i.e., not spending on products) too much of its internationally earned income. In other words this IMCU would encourage sufficient spending globally to produce enough profit incentives in export industries of nations to help assure global full employment,

(2) to provide an automatic mechanism for placing a major burden of correcting international trade imbalances on the nation running persistent export surpluses,

(3) to provide each nation with the ability to monitor and, if desired, to Globalization, international trade and international payments 163 control movements out of the nation of (a) flight financial funds, as well as money moved across national borders in order to avoid paying taxes on such funds, (b) of earnings from illegal activities leaving the nation, and (c) to prevent funds that cross borders to finance terrorist operations, and

(4) to expand the quantity of the liquid asset used in settling international contracts (the asset of ultimate redemption) as global capacity warrants while protecting the international purchasing power of this asset.

The IMCU system would have a built-in mechanism to encourage any nation that runs persistent trade surpluses of exports over imports to spend what is deemed (in advance) by agreement of the international community to be “excessive” credit balances (savings) of foreign liquid reserve assets that have been deposited in the nation’s deposit account at the IMCU. These accumulated credits (saving out of international earned income) represent funds that the creditor nation could have used to buy the products of foreign industries but instead used to increase its foreign reserves in terms of its deposit at the IMCU. When a nation holds excessive credits in its deposit account at the IMCU, it would mean that these excess credits are creating unemployment problems and the lack of profitable opportunities for business enterprises somewhere in the global economy.

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  1. August 9, 2017 at 12:25 pm

    It seems to me this scheme does not address the two most fundamental monetary issues:

    a. At (2), it is not nations but individuals who trade and transfer funds internationally.

    b. Insofar as money is taken to be valuable and therefore exchangeable for goods (when in fact it is created as credit in exchange for indebtness), (3) has become necessary but monetary fraud, theft and tax avoidance remain attractive so circumvention of it is likely.

    In addition, (1) is conceiving employment in terms of mass production without regard for its need, resource usage, environmental damage and effect on necessarily local employment in personal and environmental care. (4) is still conceiving “liquid assets” in terms of quantity rather than flows, missing the point that need for flows can be variable and intermittent.

    If the financial system were rearranged international on the personal credit card system, everyone or any sub-project could have finance as needed up to globally affordable limits, written off as they regenerated the social as well as material wealth and infrastructure of their localities by team-work and self-employment. Wages need not therefore enter into costs and prices could largely reflect net resource usage; in this respect government costs would be no different so the need for taxation would disappear. No need, either, to penalise the disadvantaged, be they individuals or nations with few resources.

    Mass production and distribution could reduce largely to materials and capital equipment, reducing unobservable environmental damage. The big difference would be that inevitable mistakes would be localised and observable rather than perpetuated by distant kings, governments and elites: conscious only of themselves and irreparable damage already done.

  2. August 9, 2017 at 2:45 pm

    Needs true international cooperation. Day dreams.

    Why would China agree?
    Minuscule concessions will take years of futile bazaar-type negotiations.

  3. August 9, 2017 at 3:03 pm

    Feds set rules for CA paying NY. Any global Fed?

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