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How Did It Start?

Professor of the Faculty of Political Studies Radhika Desai in her work “The Past and Future of the International Monetary System” talks about an interesting historical fork. It is how, at the end of World War II, the great economist Keynes proposed to make a single international currency. It would replace the then hegemonic British pound sterling and the rising dollar. This international currency would be pegged not to gold, but to a whole range of commodities. In the 2020s, this idea is again being explored by some Keynesian (left) economists.

By the 1940s Keynes had proposed a radical revision of the international monetary system. As that it was to be, in almost every major respect, the opposite of the gold sterling system.

In the proposed system, national currencies would be pegged not to gold. They would be pegged to a currency created on the basis of general interest. It would be called Keynes’s “bancor”. It was to be used to resolve imbalances between central banks only. Its value would depend not on the price of gold. It would reflect the financial interests of a narrow wealthy elite. It would also depend on a basket of commodities that play a systemic role in world trade. Due to this, the population would be more interested in expanding production and ensuring the stability of the money supply.

Where It Might Lead to?

This linkage to commodities was based on Keynes’s recognition of the fact that it is the rising prices of raw materials along with the cost of labor. In this case, it causes inflation and the depreciation of money. This idea was developed by Prabhat and Utsa Patnaik in their brilliant latest work called The Theory of Imperialism.

In his proposals, Keynes also recognized the need to subordinate the financial system to production. He proposed measures to control capital transactions. They limit the freedom of action of financial capital to meet the needs of the national economy. These measures would better regulate the financial sector at the national level. They would allow funds to be directed to finance long-term productive investments. Instead of unproductive and even unproductive short-term speculation. Also, they would manage the national economy to ensure full employment without having to worry about the consequences of changes in the exchange rate.

Finally, recognizing the damage that stronger countries could inflict on weaker ones. Using a balance of payments deficit changing the mechanism, Keynes proposed the International Clearing imbalances, trade surpluses, and trade deficits and capital flows. He also invited creditor and surplus countries to adjust trade and financial imbalances. So that a country with a trade surplus would be required to take in more imports. And a country with a trade deficit would be obliged to export more and consume less, recognizing the solidarity liability of both creditors and debtors in any credit/debt relationship. This set of functions was intended to direct the deflationary process of changing trade balances to stimulate growth.

As a Result

At the end of World War II, it became clear how crazy the idea of promoting national currencies to be the world currency was. The authoritarian and imperial world that underpinned the sterling system has come to an end. But US politics and its political elite tried to emulate British dominance and became “the leading segment of the global economy.”

As a result, we got another financial system that had its pluses and minuses. Lots of different economists during their life tried to develop the system. One of them was Tirole and his work about policymakers. Researchers and policymakers tried to apply antitrust measures common to all sectors of the economy. They started limiting prices or banning cooperation between major competitors.

Jean Tirole came to the conclusion that such measures are not always effective, and sometimes harmful, and suggested that each industry be approached. The methods he developed allow monopolies to work more and at the same time not restrict competition. Tirole has written on industrial market theory, game theory, incentive theory in supply and regulation, prudential regulation of banks, competition in telecommunications, and financial theory.

In 1999, Tirole, in collaboration with economist Mathias Dewatripont, published the classic article “Lawyers” (Mathias Dewatripont, Jean Tirole. Advocates). In it, scientists showed that the departure from the adversarial court in favor of establishing goal truth leads to selective consideration of the evidence. Comparing the process where the evidence for and against is collected by an impartial person with the process where there is a prosecution and defense looking for contrary evidence. Scientists have found that in a model where obtaining evidence is costly and cannot be falsified. It is impossible to build such a system of incentives to force an impartial person to find the goal truth. Only in a process with conflicting parties, it is possible to discover a full set of evidence for and against.