Keynes' Bancor and BRICS+ Currency: Two Missteps for a Solved Problem!

The BRICS+ currency debate, Keynes' Bancor concept, and why modern monetary systems question the need for a shared currency.

The topic of a common BRICS+ currency has caused some of its advocates to return to plead the cause of the currency project with the function of rebalancing the trade and payment balances of states, presented at Bretton Woods back in 1944 by British economist John Maynard Keynes and known to the world as Bancor.

The topic is so hot that before and after the BRICS+ meeting held in Kazan, a debate broke out on the web with rather heated fires, between those who argue for the need for common instruments with reserve functions to put an end to the so-called dollar standard, propaedeutic according to Ioro to keep trade balances between states in balance; and those who, on the other hand, in line with the theories well expounded by Modern Monetary Theory (MMT) and its founding father Warren Mosler, argue that such a need does not exist since the solution is already present in the current monetary system and consists in adopting the policy of flexible exchange rates on one's own currency.

The exchange of opinions and the sending of articles and documents in support of one's thesis was massive. So it was that strengthened by the principle of scientific verification that has always accompanied me in my studies for the honor of truth, I decided to return to the books for a review of what I had already studied and decoded at the time, in relation, precisely, to what is the true nature of JM Keynes' Bancor.

Before carefully analyzing the topic, I intend at once to stigmatize those who: fantasize about economic doctrine—as if almost 80 years were a day—have the pretension of believing their position in favor of the introduction of a common currency for the BRICS+ to be right, covering themselves behind the reputation of someone who is long dead and buried, instead of getting down to the books and studying. Those who operate in this way certainly cannot be honored with the gift of credibility.

Fortunately, today those who want to study economics in depth can count on advanced economic doctrine that, thanks in part to the significant contribution of Warren Mosler, provides us with effective scientific tools. These tools enable us to understand fundamental aspects that not even John Maynard Keynes, despite his genius, had been able to decipher completely. This limitation was understandable given the historical context in which he operated: the era of the Gold Standard, which mandated the convertibility of currency into gold and the maintenance of fixed exchange rates between currencies. In that context, pursuing breakeven in international trade was not only a priority but an economic necessity.

Before going into the technical details of what the Bancor was, it is useful to provide a brief historical background to clarify the context. This is important to avoid equating a great economist like Keynes with those who improvise as economics experts, writing articles that claim to solve problems that are already outdated, while also ignoring the basic principles of fixed and flexible exchange rates.

Both, Keynes in his day, and contemporary economists address the problem of the trade balance of states. However, there is one major difference: Keynes was operating in the context of a monetary regime in which currency was convertible into gold by law, whereas today we are in a system based on fiat currencies with flexible exchange rates. This distinction is crucial to understanding the logic of the solutions proposed in different eras.

When Keynes proposed the Bancor at Bretton Woods, he assumed that the currency was convertible into gold, since we were in the Gold Standard (at least formally). Hence he derived his entire proposal, motivated by the noble intent of preventing countries with trade surpluses from requiring the conversion of their currencies into gold. However, this solution was closely linked to the principle of convertibility, an indispensable and legally sanctioned aspect at the time.

In that context, trade deficits translated into real debts, since the currencies received in exchange for goods and services had to be theoretically convertible into gold. These debts, however, were never actually settled or required, at least until 1971, when the Gold Standard was abolished.

One limitation of Keynes' vision was that he did not see money for what it really is: a monopoly of the state. Based on the economic and doctrinal knowledge of the time, Keynes devised the Bancor, a solution that we can now call outdated. In fact, with the current flexible exchange rate regime, it is precisely this aspect that is the real solution to the problem of imbalances in balances of payments, the same one that worried Keynes 80 years ago and that today is at the heart of the ideas of those who advocate a new version of the Bancor, perhaps in the form of a common currency for the BRICS+.

At Bretton Woods, however, reality took a different direction. The economic elites of the time, probably already better informed than Keynes about how modern currency works, summed it up with a practical decision: “Gold is the dollar and all other currencies must maintain parity with the dollar”—in other words, fixed exchange rates. However, this system remained largely theoretical. States issued unlimited, nonconvertible currency through instruments such as government bonds, still used today to manage excess savings.

Everything went smoothly (at least for the usual knowns) until, in 1971, someone—say, a Frenchman—showed up at the Federal Reserve (Fed) to collect what the Bretton Woods agreements called for: gold in exchange for the dollars he had on deposit.

It was August 15, a Sunday evening, when the then-president of the United States, Richard Nixon, made a momentous decision. He interrupted in prime time "Bonanza,” a famous Western TV show beloved by Americans, perhaps even more than he was. The series told the story of the Cartwright family on their ranch, with Ben Cartwright, his three sons, and the Chinese cook as the main characters.

At that time, the United States was at the height of its power: it had just conquered the moon, Vietnam was not yet a defeat, and new prospects were opening up in relations with China. But the White House needed to make a historic announcement, one that would justify even the interruption of a much-loved show. And Nixon did: he changed the course of history with what would be remembered as the "Nixon Shock.” It was the end of the stable exchange rate system, the beginning of the era of floating currencies, and the financial boom.

End of the convertibility of the dollar into gold, then! But not by shared choice: it was a decision imposed from above, supported by complacent rulers (not to mention economists and other ignoramuses of various kinds). From then on, the dollar and other currencies were to be “gold” and scarce for the people, but “fiat” (i.e., fiduciary currency) and abundant for the elites.

But what did the Bancor have to do with it? More importantly, does it make sense to have the BRICS+ repeat the European single currency experiment?

Soon said!

To explain this concept, I will refer to some of Keynes' writings, which I will comment on as I go along:

Keynes' proposal is based on the idea of extending the basic principles of banking to the international context. As he explains to the governor of the Bank of England, these principles provide that when a person chooses not to use his resources temporarily, they are not taken out of circulation. Instead, the resources are made available to a third person ready to use them, without the former losing his or her liquidity or the right to deploy his or her means at any time he or she wishes.

Keynes' objective is thus clear: he aimed to apply the same mechanism that governs banks, namely “money lending,” to trade relations between sovereign states. This inevitably implies the concept of borrowing and, consequently, of debt. However, it is important to remember that, in a monetary regime based on fiat currencies, trade balances between states do not represent a simple ratio of debt to credit. Rather, they constitute a record of the flows of goods and capital exchanged between nations. Keynes' proposal to introduce the Bancor was precisely intended to finance and manage these relationships, preventing them from becoming unsustainable constraints on the states involved.

From these principles follows the creation of an international clearing house (the so-called Clearing Union), the purpose of which is to counterbalance, that is, to offset, the economic transactions (trade in goods and services and movement of capital) put in place by the adhering states (or rather, by their respective national bodies, economic operators and consumers) among themselves, and then to process the resulting credit and debit balances in the hands of each adhering state to *offset them in turn among themselves.”

Based on its overall trade balance, each country would have a credit or debit balance with the Clearing Union, expressed in a specific unit of account called Bancor. This unit was not merely an accounting tool, but could be converted into currency: the Bancor, in fact, represented real monetary value.

In short, Keynes envisioned the establishment of an international body, the Clearing Union, in which the balances of trade balances and payments between member states would be recorded and converted into Bancor. Then, through a system of cross-borrowing, the balance between surplus and deficit states would be rebalanced. Granting Keynes a forward-looking view, it can be argued that, were it not for the nature of real loans, this operation would be akin to a fiscal transfer within a perfect currency union. To reiterate, since these were loans, this implied specific consequences and constraints on governments, as I will explain below.

“This balance can be drawn upon not only by the country holding it, but also by any country in deficit (i.e., with a deficit budget), which can borrow of its own by taking advantage of the balance of any member state in surplus;[3] this opportunity for the deficit state does not translate into a burden for the states in surplus. The latter simply undertake to prevent their respective surplus balance, as long as they choose to maintain it, from exerting restrictive pressures on the general economy and, by extension, on their own economies[4]: thus “the fact that the balance that [the surplus country] temporarily chooses not to employ is not taken out of circulation does not penalize the country in question (on the contrary, it favors it). “ [5]

In this view, the system would have allowed deficit countries to borrow by drawing on the credit available in the Clearing Union. However, surplus states would not have suffered direct losses, as the temporarily unused credit balance would have remained in circulation, thus avoiding restrictive effects on global and, by extension, national economies. This configuration was also advantageous for surplus countries, which were not penalized for maintaining their credit.

Here is a more straightforward and understandable version of the text, keeping the tone and style:

The surplus countries tell the deficit countries, in essence, a very simple thing: “As long as it suits us, we lend you our money. When it stops being convenient for us, we no longer lend it to you, and you have to fend for yourselves. Or, if you want to keep receiving it, you pay us more interest or give us concrete guarantees, such as public property, monuments, gold, and the like.”

This dynamic highlights an implicit but obvious concept: those who lend the money decide how it will be used. So it is clear that loans given to a member state in deficit must be tied to a specific purpose, such as boosting productive investment to support domestic demand.

And here we come to the crux of the matter. Doesn't the phrase “all borrowing must be purpose-bound” sound familiar? It does to me!

Aren't the funds that Europe grants with the Next Generation EU or loans from the MES (European Stability Mechanism) subject to precise rules? This money must be spent according to the conditions imposed by the Lords who grant it, with strict policies to control public spending.

The same applies to loans from the International Monetary Fund (IMF), which often include stringent conditions, substantially limiting the freedom of action of governments that accept them.

In other words, the power that Keynes envisioned for the Clearing Union—the idea of a supranational organization to regulate economic imbalances between countries—is not very different from that exercised today by entities such as the ESM (European Stability Mechanism) or the IMF (International Monetary Fund), which are often perceived as veritable “global loan sharks.” Even those who advocate the idea of a common currency in emerging blocs, such as the BRICS+, have to deal with these kinds of mechanisms.

To entrust an institution with the power to issue or manage currency and to lend it is to hand it immense authority. If this authority is not handled with honesty and transparency—let us even say with holiness worthy of Our Lord Jesus Christ—history teaches us that it risks creating problems for democracy and the sovereignty of peoples. Do you agree?

Finally, Keynes envisioned that each country participating in the Clearing Union system would have time to rebalance its economic relations with the rest of the world. To this end, each country would receive an initial line of credit in Bancor, the proposed international currency, to facilitate the necessary adjustments.

This structure, then, was certainly no less ambitious—and less dangerous, if mismanaged—than that of current systems.

To fail to realize, as written in the previous quote, the concepts behind the recent renegotiation of the new Stability Pact—which will henceforth guide the Maastricht agreements, the implementation of which is the main cause of the European economic disaster—is to be blind or, worse, to act in bad faith.

I believe that what I have set out so far is sufficient to show how wrong and misplaced it is to refer to the Bancor to persuade the BRICS+ countries to adopt a common currency. This, at best, would be an essentially useless new means of payment; at worst, it would represent a cage of fixed exchange rates that would deprive their governments of the freedom to spend, just as is the case in the Eurozone today.

If, moreover, Keynes, in designing the Bancor, had not been driven by the need to prevent trade surpluses from being converted into gold—which would have irretrievably undermined his noble intentions of ensuring full employment—his project today would fit perfectly into the designs of the globalist powers, fueled by neoliberal ideologies that cause enormous suffering to the peoples.

If one were to ask those who propose to endow the BRICS+ with a common currency how they would actually solve the problem of imbalances in trade balances, one would never receive a concrete answer. This is further proof of the fallacy of their claims because answering such a question would lay bare all their fantasies, fueled by the belief that they are “chosen” but have not thoroughly studied the subject.

In conclusion, those who seek a solution to a problem that does not exist today can only be one of these three things: a fool, an ignoramus in economics, or a corrupt person. The choice is yours.