[Viewpoint] U.S. dead wrong on currency issue

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[Viewpoint] U.S. dead wrong on currency issue

If you visit the National Portrait Gallery in London, you can view a painting of the famous economist John Maynard Keynes and his wife Lydia smoking together.

It would make a perfect advertisement for a cigarette campaign. Naturally, Keynes did not enjoy longevity. He suffered from heart problems in middle age, but his doctor did not fully understand his illness.

His wife often enjoyed having a smoke with him. In his later years, Keynes is said to have suffered from extreme fatigue. The ailing economist travelled to the United States to represent Britain in negotiations with Washington to design a global finance structure after World War II.

Keynes hoped that international finance would be free from the stupidity of convention and the blind belief in the market. While he wanted currency to be released from the fetters of gold and become a means to accomplish full employment, he wished that it would be appropriately controlled by the wisdom of the people.

It is a well-known fact that Keynes proposed the establishment of an international central bank and the creation of a new common world unit of currency called the bancor. A less understood point is that the bancor was essentially a form of an overdraft account. Each member country would be given an account, and if they experienced a trade deficit they could freely borrow bancors within a preset limit. Moreover, when the trade deficit and surplus of the member countries extended beyond the allowed limit - in other words, when a global imbalance occurred - the deficit countries and surplus countries would equally share the burden of modification. The deficit countries would devalue their currencies against the bancor and adopt a retrenchment policy, while the surplus countries would revalue their currencies upward against the bancor and pursue expansion policies.

In the end, Keynes’s plan was not adopted. U.S. delegate Harry Dexter White and American economists were wary that Keynes’s proposal could result in excessive currency supply. Moreover, they preferred a more traditional way of resolving imbalances through painful retrenchment policies pursued by the deficit countries. Biographer Robert Skidelsky insists that Keynes’s proposal was an outcome of his passionate patriotism. As Britain had used up its gold during World War II, it had a huge debt to the United States and would not be able to avoid a financial deficit because of post-war restoration efforts. Give this, Keynes hoped to minimize the humiliation his country was to suffer at the hands of the United States. White wanted to corner Britain by weakening the pound and solidifying the dollar-based financial order through its enormous gold reserves. We should be careful not to be swayed by conspiracy theories, but both sides certainly had their own national interests in mind.

The cooperation and friction between Keynes and White right before the end of World War II is an interesting page in history. It is also relevant to review the debate between London and Washington in reference to the latest global financial crisis. In retrospect, the international financial order of the last three decades miserably failed to prevent excessive currency issues and global imbalances - the two areas that Keynes and White had focused on. And the United States is at the center of the fiasco. The U.S. gave up the responsibility as a global central bank to appropriately control the dollar volume to please its own citizens and Wall Street. At the same time, it had the privilege of being home to the world’s key currency and effectively exempted itself from the duty of a deficit country. As a result, the United States promoted global imbalance.

Suffering from a deficit, the United States insists that China, which is a surplus country, share the responsibility of resolving global imbalances through the revaluation of the yuan and by adopting expansion policies.

It is an irony of history that the United States finally understands the wisdom of Keynes as it stands in the opposite position 60 years later. Meanwhile, China is growing more aggressive day by day, and the president of the central bank and best-selling economic writers are competing to criticize the U.S. dollar.

They argue that Washington is evading its duty by pressuring China to revalue yuan and that it should end the era of the dollar by going back to the gold standard system or issuing global currency, as Keynes had proposed. Do they understand that Keynes fought all his life to end the gold standard and would have supported the revaluation of the yuan to resolve global imbalances?

President Lee Myung-bak has proposed the establishment of a global financial safety net to be included in on the main agenda at the G-20 summit in November. We welcome the proposal. Korea’s role in the G-20 meeting can be found by deviating from the self-centered ideas of the United States and China and understanding the global perspective of Keynes.


*The writer is a professor of economics at Sogang University.

by Song E-young
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