We should have listened to Keynes

I meant to blog about Keynes' idea of the bancor and taxing surpluses, but Felix Salmon beat me to it.
He borrows "George Monbiot’s lucid summary of John Maynard Keynes’ proposal":

He proposed a global bank, which he called the International Clearing Union. The bank would issue its own currency – the bancor – which was exchangeable with national currencies at fixed rates of exchange. The bancor would become the unit of account between nations, which means it would be used to measure a country’s trade deficit or trade surplus.

Every country would have an overdraft facility in its bancor account at the International Clearing Union, equivalent to half the average value of its trade over a five-year period. To make the system work, the members of the union would need a powerful incentive to clear their bancor accounts by the end of the year: to end up with neither a trade deficit nor a trade surplus. But what would the incentive be?

Keynes proposed that any country racking up a large trade deficit (equating to more than half of its bancor overdraft allowance) would be charged interest on its account. It would also be obliged to reduce the value of its currency and to prevent the export of capital. But – and this was the key to his system – he insisted that the nations with a trade surplus would be subject to similar pressures. Any country with a bancor credit balance that was more than half the size of its overdraft facility would be charged interest, at a rate of 10%. It would also be obliged to increase the value of its currency and to permit the export of capital. If, by the end of the year, its credit balance exceeded the total value of its permitted overdraft, the surplus would be confiscated. The nations with a surplus would have a powerful incentive to get rid of it. In doing so, they would automatically clear other nations’ deficits.

Would have been a hell of a good idea. The whole problem with global economic adjustment is the asymmetry between surplus and deficit countries.

Will Global Imbalances Return?

Barry Eichengreen discusses whether global imbalances will return. The recession has reduced the US current account deficit through two channels. The income decline has led to reduced imports, and the destruction of household wealth has led to an increase in savings. This offset the longer-term forces that were generating current account deficits. The key question, however, is what happens after we emerge from the crisis. This is especially concerning given the large fiscal stimulus and large monetary stimulus that have been policy reponses to the crisis. He notes:

...once American households rebuild their retirement accounts, they may return to their profligate ways. Indeed, the Obama administration and the Federal Reserve are doing all they can to pump up US spending. The only reason the US trade deficit is falling is that the country remains in a severe recession, causing US imports and exports to collapse in parallel.

With recovery, both may recover to previous levels, and the 6%-of-GDP US external deficit will be back. In fact, there has been no change in relative prices or depreciation of the US dollar of a magnitude that would augur a permanent shift in trade and spending patterns.

The answer depends a lot on decisions outside the US. For example, will China continue to lend to the US. A disaster could arise if China turns away from holding US assets. He concludes:

There are two hopes for avoiding this disastrous outcome. One is relying on Chinese goodwill to stabilize the US and world economies. The other is for the Obama administration and the Fed to provide details about how they will eliminate the budget deficit and avoid inflation once the recession ends. The second option is clearly preferable. After all, it is always better to control one’s own fate.