G-7 Should Give
Keynes New Look

By Jonathan Power

Badly shaken by the turbulence in the money markets and the Mexican stock market crash, the Group of Seven met at the end of last week deter- mined, if rhetoric is any guide, to put the world's financial system to right, but pre-programmed by their advisors not to stray from a safe brief. Reforming the international financial institutions - the International Monetary Fund and the World Bank - with a safe brief is like conceiving children with safe sex, a little chancy. Yet this, say the seven Western leaders, is the task they've set for themselves.

John Maynard Keynes, one of the two great architects of the post-war reform of the disordered financial world that sowed the seeds for battle, had a blueprint that is worth discussing today:

Keynes proposed an IMF of a size equal to one-half of the world's imports, enabling it to exercise a major influence on the global monetary system. Today it controls liquidity equal to 2 percent of the world imports in an age when more than $1 trillion crossed international boundaries every 24 hours.

Keynes wanted the IMF to become a world central bank, issuing its own reserve currency and creating sufficient international reserves whenever and wherever needed. Today, the IMF does possess a very minor currency, to so- called SDR's (Special Drawing Rights), but they constitute only 3 percent of the world liquidity. How can it do a good job in Russia, in Algeria or in Mexico when its hands are so tied?

Keynes regarded balance of payments surpluses as a vice and deficits a virtue, since deficits sustained effective global demand. He advocated a penal rate of interest of 1 percent per month on outstanding surpluses. Imagine the effect of such a policy applied to Japan: the Japanese/American trade quarrel would simply not exist.

Keynes believed there was no need for persistent debt problems - surpluses would be simply used by the IMF to finance deficits. "The lost decade" of the 1980's that almost broke the back of Latin America would never have been.

At the time, in 1944, it looked as if Keynes and his American colleague, Harry White, thought they's persuaded the international community to reject unilateralism in favor of multilateralism. But there we are today, with nothing but ad hoe improvisations, either made unilaterally or by a loose and uneven coordination of the G7. The IMF, in effect, is left as a policeman of the poorer countries of the Third World, handing out punitive measures for dealing with debt problems and for fulfilling international reserve requirements.

Likewise, its sister organization, the World Bank, has failed, with perhaps the exception of South Korea, to build up the creditworthiness of individual developing countries, thus enabling them to walk with confidence into the private capital markets.

Never in the 50 years of the existence of the international financial institutions has the need for a re-design and a refit been more obvious. The IMF needs to refind its role of being the ballast that stabilized global economic activity. It needs to act as a lender of last resort to financial institutions and to be able to calm the financial markets when they become disordered. It needs to be able to regulate banks and financial institutions by applying a small tax on international currency transactions to curb excessive speculation. And it needs to start creating substantial new amounts of liquidity, especially at a time when global inflationary pressures are low and most industrial countries are concentrating on reducing their budget deficits.

The World Bank, for its part, must find way of recycling larger resources to developing countries, and do this in a way that more emphasizes a better distribution of income and a type of economic growth that is effective over the long haul.

(Reprint, San Francisco Chronicle, June 19, 1995 edition)

Copyright © 1996. The Light Party.

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