Groping for a new international financial system

Wilberne Persaud, Financial Gleaner Columnist

John Maynard Keynes spent a good period of his last several years in service to humanity - he figured capitalism was likely to self-destruct if a more rational and just international monetary system was not constructed after the war.

In his 1923 A Tract on Monetary Reform, he described the gold standard as "In truth … already a barbarous relic".

In his A Treatise on Money, he paraphrases Dr Freud's view that "there are peculiar reasons deep in our subconsciousness why gold in particular should satisfy strong instincts and serve as a symbol".

These instincts are today, perhaps just as strong. For as anxiety over wealth holdings increases, so does gold attain peculiar value.

Keynes was never merely a theoretician of the closed economy with which his major work dealt. He was also civil servant, patron of the arts, extraordinarily skilled negotiator and speculator, earning significantly for both himself and friends, for King's College and Cambridge University. He worked for wartime and post-war Britain without payment.

No slouch at mathematics, he rejected the notion that economic science boiled down to a kind of applied mathematics. He would, I venture, not be surprised at the mayhem modern-day Wall Street 'Quants' and their associated derivatives created.

His vision linked time, uncertainty and money: "The importance of money essentially flows from its being a link between the present and the future … . Money in its significant attributes is, above all, a subtle device for linking the present to the future; and we cannot even begin to discuss the effect of changing expectations on current activities except in monetary terms."

He wrote in this fashion, we might conjecture, because he honestly felt truth, beauty and love were the true essential attributes worth the striving. Much of his life exemplifies these ideas - ballet and the arts, museums, search for values beyond the vulgar material. That was another side of Keynes often overlooked.

A new crisis

Of what use is the foregoing discourse, you may ask? Well, merely to set the background, the tone if you will. Today, commentators and news reports project the financial woes of Greece, Ireland, Portugal and Spain as likely to lead to collapse of the euro; pessimists go so far as to suggest collapse of the European Union itself.

All this is predicated on the initial Wall Street meltdown of September 2008.

Wall Street, it is claimed, is again whole. Yet, lending to Main Street flounders.

Bonuses climb to their pre-crisis heights; some in the US Congress, and commentators, blame China for keeping the value of its currency artificially low, thereby endangering the world's economic stability- oblivious to the US Federal Reserve's zero interest rate funds giveaway.

The historical period of relevance to which these specific financial and economic conditions can most sensibly be compared is the period immediately preceding Bretton Woods when the world's economic powerhouses created the International Monetary Fund and the International Bank for Reconstruction and Development (IBRD-World Bank).

Keynes had prepared drafts of what a new world monetary system should look like. The drafts went through several revisions, in the end resembling the one put forward by Harry White of the US.

In the first draft, he soundly puts down the 'let the free market reign and correct itself' mantra evident at repeal of Glass Steagall in 1999. Here's a piece of what he wrote: "To suppose there exists some smoothly functioning automatic mechanism of adjustment which preserves equilibrium if only we trust to methods of laissez-faire is a doctrinaire delusion which disregards the lessons of historical experience without having behind it the support of sound theory".

He considered four key issues still of profound importance today:

The mechanism of currency and exchange;

Commercial policy governing tariffs, subsidies, import regulation etc;

Predictable and orderly production and distribution of primary products, particularly in face of fluctuations leading to risk and losses; and

Investment aid.

At the end of the negotiations, he wrote to colleague Richard Kahn: "The Americans have no idea how to make these institutions into operating international concerns, and in almost every direction their ideas are bad. Yet they plainly intend to force their own conception through, regardless of the rest of us … . The Americans at the top seem to have absolutely no conception of international cooperation; since they are the biggest partners, they think they have the right to call the tune on practically every point. If they knew the music that would not matter so much; but, unfortunately, they don't."

Keynes had come face to face with economic power. Lend-lease payments were required for British borrowing during the war. The US was in the ascendancy. He wanted to create a world central bank.

Why should he have thought the US would abandon the chance to 'call the tune'? After all, when Britain ruled the waves, they knew both the music and called the tune.

Today, G20 summits and bilateral China-US diplomatic engagement need not only the kind of analytic capacity Keynes exhibited; they also need true cooperation.

Yet US domestic politics, as it famously did during Bretton Woods' discussions, shall intervene. Keynes had written to Richard Hopkins of the UK Treasury: "The staging of the vast monkey-house at Bretton Woods is, of course, in order that the president can say that 44 nations have agreed on the fund, and the bank and he challenges the Republicans or anyone else to reject such an approach. I should say this tactic is very likely to be successful".

We should only hope that stark reality of the high stakes causes true internationalism to seep into the discourse.

wilbe65@yahoo.com