Currencies—Time for a Bretton Woods II

Abstract

This chapter proposes a cooperative international monetary system. A first proposal for such a system was submitted by John Maynard Keynes at the Bretton Woods conference in 1944. Keynes foresaw a complementary currency for international economic exchange, called Bancor, operated by an International Clearing Union. Furthermore, sanctions both for trade surplus and deficit countries would have dis-incentivized and remedied trade imbalances. His proposal was rejected by the US. Instead, the dollar hegemony was established. Consequently the Bretton Woods system collapsed in the 1970s due to its inherent construction failure. Macroeconomic instability, but also the debt crisis in low-income countries characterized the following decades. As a result of the financial crisis in 2008, the Keynes proposal has been rediscovered. UNCTAD senior economist Heiner Flassbeck presented an alternative model based on real effective exchange rates (REER) which deems the adjustment of exchange rates to real purchasing power in both countries as sufficient. A synthesis of both approaches, Keynes and Flassbeck, is proposed.