An IRE and EPS Workshop with the Support of the Charles Leopold Mayer Foundation. Paris, June 16 and 17, 2008
With : James K. Galbraith - Barkley Rosser - Pierre Jacquet - Christian Chavagneux - Paul Davidson - Bill Black - Lord John Eatwell - Ping Chen - Luiz Carlos Bresser-Pereira - Bernard Lietaer - Claude Gnos - Robert Guttmann - Jan Kregel - PAul H. Dembinski - Pierre Calame - Wojtek Kalinowski - Gilles Raveaud - Ram Argawala - Arnaud Blin - Jacques Fontanel - Thea Harvey - Lucy Law Webster - Alain Pargue
The debt crisis, the Russian crisis, the Asian crisis, many speculative raids... For the last twenty years or so, international finance has had the lion’s share in economics news. Today, we are faced with the fall of the dollar, and with the subprime crisis which has become a banking and financial crisis of international magnitude. Minor remedies to these turmoils have been proposed time and again, like increasing transparency, or introducing some regulations. But, unlike the Bale II agreement - a set of prudential measures for the banking system - no new architecture has been proposed yet for the international financial and monetary system (IFMS). Besides, it is noticeable that the IFMS is only rarely apprehended as a whole. Its consequences on the ’real’ economy, on political systems and on societies are not often mentioned either, and when they are, they are reduced to the inescapable negative externalities of an otherwise efficient system, as it copes with billions and billions of dollars daily.
Moreover, despite the fact that the financial and monetary arrangements that constitute the IFMS influence international political relations and peace in the world, the deep political nature of the IFMS seems to be overlooked. Calling the IFMS a political institution might raise a few eyebrows. But we may want to remember that the current IFMS is the heir of the Bretton Woods agreements. During the talks at the Bretton Woods conference, two plans were discussed: White’s, and Keynes’s. White’s plan was finally adopted. But this did not keep Keynes from continuing his unofficial cooperation with White, putting all his energy, and even jeopardizing his health, in the design of a new international monetary and financial infrastructure.
How are we to understand Keynes’ dedication?
Mainly by remembering the deep trauma of the 1930’s Great Depression. A trauma shared by many contemporaries of Keynes, such as, among other great names, John Kenneth Galbraith.
For Keynes, the deep reasons for WWII were clear: the Versailles Treaty, and its unrealistic demands for "reparations" to the French and English, which were nothing more than an expression of humiliation and a wish of retaliation, and could only lead to more bloodshed.
Still, we know the link that Keynes established between the international monetary system and peace. For Keynes, the structure and nature of international political relationships depends on the IFMS. This is why, during the 1920s, Keynes opposed as much as he could the return to the gold standard, a system which, he thought, was particularly prone to raising national interests against one another. History did not prove him wrong.
For the British economist, the role of the IFMS could not be reduced to financial and monetary matters. On the contrary, Keynes wanted to submit the IFMS to political and ethical demands, starting with world peace. To foster peaceful relationships between nations, Keynes thought that the first thing to do was to prevent war.
Keynes had identified two main causes for conflict: the rise of poverty, and the destabilizing effect on national economies of highly mobile speculative capital flows.
Understood as the first brick of a global governance that would promote peaceful relationships between nations, the IFMS had to solve these two issues. The first role of the IFMS was thus to ensure the prosperity of the peoples. By prosperity, Keynes meant full employment, growth, price stability, extended social programs, and a fair distribution of income. The second role of the IFMS was to limit the mobility of capital flows. This was the precondition for national economic and social policies to be autonomous, something Keynes attached great importance to. To achieve these goals of stability, prosperity and national autonomy, Keynes proposed several innovations, such as the creation of an international money (the Bancor) and of a clearing house (the IUC). Keynes wanted to organize cooperation between states, to set up a collective management of financial and monetary affairs, to replace bilateral relationships with a generous multilateralism. Such ideas were close to the core of Keynes’ views about the economy, seen as a system to which pacific goals are assigned, where international trade is a win-win process, a process which preserves peace, and avoids tensions between countries, as economic tensions can lead to political tensions and threaten peace.
If Keynes’s proposals only had a limited success, Keynes still managed, with White, in the IFMS adopted in Bretton Woods, to limit the freedom of movement of capital, and to put in place fixed exchange rates. But, as Keynes had predicted, it was not possible for the dollar to be at the same time a national currency and an international one. Thus, the IFMS progressively eroded, Richard Nixon put an end to the gold convertibility of the dollar in 1971, fixed exchange rates were suppressed in 1973, the 1980s saw the decompartementalisation, deregulation, and disintermediation of financial markets, several financial crises developed¼ without any of these events prompting measures up to their negative impact on economies, societies and human beings. Since 1973, finance is a place without a pilot, a system regulated by the market and no longer by states.
Should we thus look for a new Keynes’ plan, as Bernard Elie suggested more than ten years ago? We do not necessarily think so. In 60 years, the political and economic context has changed, and these changes have to be acknowledged. Still, we do think that we should inspire ourselves from Keynes and the late Galbraith. To us, Keynes and Galbraith shared fundamental views, such as the necessity to submit the economy to political decisions, to consider it as a means and not as an end in itself, to build a lasting peace, to go beyond national sovereignties, to built multilateral cooperation. These views are as necessary today as they were when they were expressed.
Indeed, the current financial and monetary infrastructure can fuel and crystallize dangerous tensions between nations, and/or be the source of social upheavals and demagogy. This is what the quarrel between the US and China about the exchange rate of the Yuan illustrates.
Year after year, the US witnesses its growing trade deficit with China. As members of the Congress well know, re-evaluating the Yuan would not change dramatically the foreign trade accounts of the US. But still, it is always an easy solution to tell voters that the problem is well identified, that it has a foreign source and that, on top of everything, it is unfair. We know that such tensions between states are dangerous, because they can lead to protectionism, and to the political consequences that protectionism entails, as history, once again, has told us.
On the positive side, the current situation might well be ripe for a return to a more cooperative attitude, to a concerted governance of the world financial and monetary problems. Such a new governance could appeal to the three main actors that are the US, China and Europe. First, the US is experiencing impressive external deficits, and is weakened by the fall of the dollar. The US might thus have an interest in a multilateral approach, even in a new Keynes’s plan, as such plans are beneficial to debtors. Second, China, despite its unprecedented growth and the power it brings, is still a developing country with many internal imbalances, and it cannot ask the Yuan to be a key reserve currency yet. Third, Europe cannot be left aside a process like this one, and is by nature interested in projects aimed at nurturing peace and stability.
The possibility of a renewed multilateralism thus seems more likely today than it did a few years ago. There is an opportunity to be seized here to think afresh our international monetary system, to break free from the current unilateralism and bilateralism in international relations, to resume with systemic collaboration and cooperation.
We propose to do our part in this dynamic by organizing a seminar whose aim will be to propose a new financial and monetary architecture, one which would promote peace around the world. This seminar is supported by the Charles Léopold Mayer Foundation for the progress of Mankind, and is co-chaired by the International Initiative for Rethinking the Economy (the economic programme of the Institute of Research and Debate on Governance) and by the Economists for Peace and Security.
Program and participants