John Maynard Keynes with US treasury secretary Henry Morgenthau at Bretton Woods in 1944. Now is the time to mobilize. Photograph: Alfred Eisenstaedt/Time & Life Pictures/Getty Image
The exit of Jim Yong Kim offers a chance to put the Bretton Woods institutions in the service of the many, not the few
On January 31, 2019, David Adler and Yanis Varoufakis write on The Guardian:
The president of the World Bank, Jim Yong Kim, will step down on 1 February – three and a half years before the end of his term – in search of greener pastures. His readiness to resign from the leadership of one the two most powerful international financial institutions is a worrying omen. But it is also an important wake-up call.
The World Bank and the IMF are the last remaining columns of the Bretton Woods edifice under which capitalism experienced its golden age in the 1950s and 1960s. While that system, and the fixed exchange rate regime it relied upon, bit the dust in 1971, the two institutions continued to support global finance along purely Atlanticist lines: with Europe’s establishment choosing the IMF’s managing director and the United States selecting the head of the World Bank.
Kim, a career physician who presented himself as a champion of poverty alleviation, now leaves the fate of the bank’s leadership in the hands of Donald Trump – the global equivalent of a progressive supreme court justice hanging up his robes in the middle of a Republican White House. Adding a touch of the absurd to the drama, it is the US president’s daughter, Ivanka Trump, who is now leading the search committee for Kim’s replacement.
But like every crisis of the Trump era, this sordid affair is an excellent opportunity to mobilize around an entirely new vision for the Bretton Woods institutions – to push for radical reforms that would put the resources of the World Bank and the IMF in the service of the many, rather than lubricating the wheels of global finance in the interest of the very few.
Such a progressive vision would bring the Bretton Woods system much closer to the lofty intentions of its framers. “Prosperity, like peace, is indivisible,” said the US treasury secretary, Henry Morgenthau, in his inaugural speech to the Bretton Woods conference, which gave birth to the World Bank (then the International Bank for Reconstruction and Development) and to the IMF. “We cannot afford to have it scattered here or there among the fortunate or enjoy it at the expense of others.”
The original Bretton Woods plan was for exchange rates to be fixed, with the IMF helping heavily indebted countries restructure their debt and a stabilization fund curbing capital flight. Meanwhile, the World Bank would offer development finance and an international commodity stabilization corporation would “bring about the orderly marketing of staple commodities at prices fair to the producer and consumer alike”. Finally, the whole system would be dollar-denominated, with the greenback being the only currency exchangeable for gold at a fixed rate.
John Maynard Keynes, the chief British negotiator at Bretton Woods, was worried that the new system could only rely on the dollar as long as America had a trade surplus. The moment the United States became a deficit country, the system would collapse. So, Keynes suggested that instead of building the new world order on the dollar, all major economies would subscribe to a multilateral International Clearing Union (ICU). While keeping their own currencies, and central banks, countries would agree to denominate all international payments in a common accounting unit, which Keynes named the bancor, and to clear all international payments through the ICU.
John Maynard Keynes, the chief British negotiator at Bretton Woods, was worried that the new system could only rely on the dollar as long as America had a trade surplus. The moment the United States became a deficit country, the system would collapse. So, Keynes suggested that instead of building the new world order on the dollar, all major economies would subscribe to a multilateral International Clearing Union (ICU). While keeping their own currencies, and central banks, countries would agree to denominate all international payments in a common accounting unit, which Keynes named the bancor, and to clear all international payments through the ICU.
Jim Yong Kim’s departure must be our cue to review role of the World Bank and the IMF. Photograph: Chip Somodevilla/Getty Images
Jim Yong Kim was once a fierce critic of the Washington consensus. In his book Dying for Growth, published in 2000, Kim railed against the World Bank’s free marketeering, the costs of which “have been borne by the poor, the infirm and the vulnerable in poor countries that accepted the experts’ designs”.
Yet as president, Kim turbocharged the bank’s commitment to private profits against the public interest. “Maximizing finance for development” (MFD), the strategy he adopted in 2015, transformed the World Bank from a direct investor in developing countries to a mere facilitator of private finance. The bank’s core activity would not be lending to governments, but to “de-risk projects, sectors and entire countries”, in effect socializing the risks on behalf of the private investors and privatizing any gains.
From this perspective, it makes perfect sense that Mr Kim resigned early to take up a post at … a private equity firm.
His decision must, however, be our cue to review the role of the World Bank and the IMF today, and perhaps to revisit Keynes’s prescient idea circa 1944.
The world today needs, as much as it did in 1944, a massive international investment program. Back then, humanity needed reconstruction after a lethal world war. Today, the planet is crying out for a green transition that will cost at least $8tn annually.
Where will the money come from? Surely not from the stressed budgets of our states.
Here’s an idea: build a new Bretton Woods and fund the International Green New Deal by simply mobilizing idle savings via a linkup between the revamped World Bank and the new IMF.
The IMF can become the issuer of a digital currency unit in which all international payments are denominated, countries can retain their currencies (that will float freely against the IMF’s unit), and a wealth fund can be built by depositing in it currency units in proportion to every country’s trade deficits and surpluses.
Meanwhile, backed by the IMF’s capacity to issue the world currency unit, the World Bank can crowd idle savings from across the world into green investments, reclaiming its soul after decades of investing in environmental destruction and human displacement.
Kim’s departure makes one thing clear: the World Bank is on the brink. New development banks are growing in size and in scope, filling the space that the World Bank has long since abandoned.
Now is the time to mobilize – to push a new crop of progressive leaders to start thinking internationally, taking their enthusiasm for the Green New Deal to the global level.
If we do not act quickly – demanding a radical change of direction – the World Bank will likely fade into irrelevance. Or worse: it will become a plaything for the Trump family and its associates, making the world into their great golf course.
From Norman Kurland, Center for Economic and Social Justice (www.cesj.org). The position with respect to the United States is applicable to all countries that make up our home, Planet Earth.
“Loans from government, humanity’s only legitimate social institution or “social tool” that has been created globally by people as a “social monopoly” should not be supported. In reference to the American state, it was created for “establishing Justice”, by providing an ultimate means for the settlement of disputes, defining and promoting fundamental human rights, creating new laws, and securing all lives. Ideally, all humans should be put in the position of paying through a just tax system for the services of government at every level. A just national or global state should have its services dependent on incomes earned by economically empowered citizens and economically competitive private sector institutions not the State for the creation of money. We should adopt a citizen-controlled banking system with each citizen inputing to the productive and consumption sides of a free and competitive market economy. Most important, citizens in the future should reverse their ever-increasingly dependency on the redistribution powers of our only legitimate monopoly the State.
“We should agree that under the U.S. Constitution standards for defining money and regulating the monetary process is and should be a legitimate function of government. However, neither the U.S. Constitution or the Just Third Way supports government “creation” of money. The State’s active role in the money creation process should be limited to determining the equal annual allotment of capital credit that each child, woman and man can use to engage in the economy’s production and consumption of marketable goods and services. This can be best done through (1) an independent central banking system (2) governed by regional citizens outside of government, (3) local citizen-owned commercial and cooperative banks that make independently-insured loans for purchasing newly issued enterprise shares that are repayable with future savings from future dividends of each share purchased with each citizen’s annual allotment, and (3 viable enterprises that will issue for sale through each citizen’s annual allotments of credit to provide the money the company needs to purchase productive growth assets for producing and marketing its goods and services for a growing global marketplace. As artificial intelligence, robotics and clean energy technology eliminate many forms of work and citizens earn profits from each year growth shares to repay the bank loans, all additional profits will begin to exceed the wages of citizens and free them to engage in continued lifetime education and training for what ever “leisure work” each citizen would love to contribute to the “common good” for the continued advance of civilization.
“One role that government can play is to fund the creation by global scientists, academics, planners and engineers of green technologies as was done through taxation for financing global threats in the Space Race and the Manhattan Project. Since the costs of creating advanced technologies would not cost any innovator or enterprise the process would eliminate any monopoly rights from patents, enabling all companies in the USA and throughout the developing world grow faster for all members of global society, spreading the Just Third Way in ways that eliminate the many threats to the survival of life because of the inherent global conflict between Monopoly Capitalism and State or Collective Capitalism.”
My colleague at the Center for Economic and Social Justice (www.cesj.org) Michael D. Greaney comments:
The main problem here is that the people in charge of the world’s central banks have no idea what a central bank is supposed to do. Their guiding assumption is that central banks were invented to finance government. They also believe (erroneously) that “money is peculiarly a creation of the State” (Keynes, Treatise on Money).
That being the case (which is demonstrably not the case), the money supply (which they believe is limited to coin, banknotes, demand deposits, and some time deposits) necessarily consists of bills of credit emitted by the State and used directly as money (e.g., the U.S. “Greenbacks”), or accepted by the central bank and used to back central bank promissory notes, which are in turn used to back new demand deposits or banknotes, i.e., “print money.” The result is an unstable, debt-backed currency.
What has been happening on the world’s stock markets is that massive quantities of money are being created by the world’s central banks to “stimulate growth.” All of this money is backed only by government debt. Very little of it is going to new capital formation, however. In an economic downturn, banks are reluctant to lend for that purpose.
The demand for new capital is derived from consumer demand — but the demand (“stimulus”) that is being pumped into the global economy in massive quantities is not going to consumers, but to financial institutions. Seeing little or no return in lending the money for new capital formation, the banks “prudently” put the money into the secondary market where they see good returns from speculating in shares, making money by going both long and short.
This, naturally, drives up the prices of shares, creating a bubble in the stock market — just as was seen in the Mississippi and South Sea Bubbles in the early 18th century, the Panic of 1825, and the Crash of 1929, among others. In the meantime, the productive capacity continues to decay, and the production of marketable goods and services that provides the tax base that stands behind the government debt and the profits that support the prices of shares declines relative to the amount of money being poured into the economy. A crash is inevitable, because there is nothing behind either the rise in the price level on the secondary market, or the new money that is causing the rise in the price level — a double whammy.
This breaks so many rules of sound finance (much less binary economics) that it is hard to know where to begin. I’ll limit myself to three:
One, central banks were never intended to finance government. They were invented to be “banks for banks,” i.e., where a commercial or mercantile bank could always get “accommodation,” i.e., liquidity, on demand by discounting or rediscounting bills of exchange, and selling securities (mortgages and bills of exchange) on the “open market,” i.e., not directly with a member bank. Governments got into it because the Bank of England, the first true central bank, couldn’t get its charter unless it bribed King William with its gold reserves, which the government replaced with “government stock,” i.e., debt.
Two, an iron rule of banking is that the reserve currency must absolutely be asset-backed. For centuries this was done by making the paper banknote currency convertible into gold or silver on demand. The Federal Reserve took this one step further, following the example of the Reichsbank, in the late 19th and early 20th centuries the soundest financial institution in the world. The Federal Reserve was established, in part, to retire the national debt, and phase out the debt-backed National Bank Notes of 1863-1913 and the Treasury Notes of 1890 (and, presumably, eventually the United States Notes of 1862-1971, the “Greenbacks”), and replace them with government debt-backed Federal Reserve Bank Notes, which would, in turn, be replaced with private sector asset-backed indistinguishable Federal Reserve Notes as the national debt was paid down.
If properly used, the Federal Reserve would have established an elastic, uniform, stable and asset-backed paper reserve currency — an incredible advance over reliance on the inelastic, albeit uniform, stable and asset-backed gold reserve currency, and, of course, eons beyond any debt-backed reserve currency, unstable by its very nature. This would in part free economic growth from the slavery of past savings. Leaving the fractional reserve requirement in place, however, still limited commercial bank lending to a multiple of the bank’s reserves, necessarily in the form of past savings.
Three, central banks should not be dealing in government securities of any kind, except as an expedient in an emergency (and even that is questionable), or as a way of retiring government debt as backing for a currency and replacing it with private sector hard assets. This latter is the only original reason the Federal Reserve was permitted to deal in secondary government securities. To prevent the Federal Reserve from being used to monetize government deficits, it was not given the power to deal in primary government securities.
Ironically, the federal government has no power to emit the massive quantities of bills of credit it has been emitting since 1862 (Article I, Section 8 of the Constitution), while the states are specifically prohibited from doing so (Article I, Section 10) — the magic words “and emit bills of credit” were deleted from the first draft of the Constitution. “Emit bills of credit” is the constitutional term meaning “create money.”
