A new international Bretton Woods system?

According to Davidson, the basic architecture of the IMCU would be designed:

1. to prevent a lack of global effective demand due to any nation(s) either holding excessive idle reserves or draining reserves from the system;
2. to provide an automatic mechanism for placing a major burden of adjustment on the surplus nations;
3. to provide each nation with the ability to monitor and, if desired, to control movements of flight capital; and finally
4. to expand the quantity of the liquid asset of ultimate international redemption as global capacity warrants (Davidson, 1992-93: 158).

The basic features of the Davidson plan involve the issuing of an international reserve asset to provide liquidity in the form of the International Money Clearing Unit (IMCU), which would be held exclusively by central banks. IMCUs would only be convertible into the deposits of a nation's currency in the clearing union and act as a unit of account between central banks. An overdraft facility would also be created for short-term creditor balances and a trigger mechanism established to prevent creditor nations from accumulating excessive credit balances as a result of running persistent current account surpluses:

The excessive credits can be spent in 3 ways:

1. on the products of any other member of the clearing union;
2. on new direct investment projects and/or
3. to provide unilateral transfers (foreign aid) to deficit members (Davidson, 1992-93: 160).

Davidson also recommends the forcible confiscation and redistribution of the surplus countries' credits to the deficit countries in the unlikely event that these credits are not eliminated. On the other hand, if a deficit country experiences persistent current account deficits at full employment, this would constitute evidence that the country is living beyond its means and cannot maintain its existing standard of living. In this case, the deficit country would be obliged to undertake an internal adjustment with the imposition of contractionary policies.

Davidson's plan effectively abandons Keynes's original idea of a world central bank and substitutes a more modest international clearing union, which would issue IMCUs. However, the basic Keynesian idea of shifting the burden of adjustment to the surplus countries forms the cornerstone of the Davidson plan. These arrangements would doubtless impart an expansionary rather than a contractionary impetus to the global economy.

Conclusion

It should be conceded that despite the desirability and urgency of these reforms, the outcome will be ultimately determined by the configuration of political power and geo-political imperatives.

It appears that the US monetary authorities would be very reluctant to surrender their privileges of dollar seigniorage until the outbreak of a major irreversible dollar crisis. The present international monetary system hinges upon very fragile and perilous foundations. The whole system is based upon the willingness of surplus countries (mostly in East Asia) to continue to accumulate US dollar reserves in order to finance successive and cumulative US balance of payments deficits.

This very delicate “balance of financial terror” to paraphrase Summers (“The US Current Account Deficit and the Global Economy”, Per Jacobsson Lecture2004) can be described in Gramscian terms as a state of “catastrophic equilibrium” which is propagated purely on the basis of political convenience but which could quite easily unravel with devastating consequences reminiscent of the 1930s experience.