In his post Clearing Up This Mess on his website, George Monbiot points out contrary to what most of the press believe Keynes didn’t found the International Monetary Fund. What Keynes proposed was the International Clearing Union, which Monbiot explains.

One of the reasons for financial crises is the imbalance of trade between nations. Countries accumulate debt partly as a result of sustaining a trade deficit. They can easily become trapped in a vicious spiral: the bigger their debt, the harder it is to generate a trade surplus. International debt wrecks people’s development, trashes the environment and threatens the global system with periodic crises.

As Keynes recognised, there is not much that the debtor nations can do. Only the countries which maintain a trade surplus have real agency, so it is they who must be obliged to change their policies. His solution was an ingenious system for persuading the creditor nations to spend their surplus money back into the economies of the debtor nations.

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 the past five years. 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 which was more than half the size of its overdraft facility would be charged interest, at 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.

Now as then, sadly, they won’t have the wit to implement Keynes’ International Clearing Union. Instead we’ll remained saddled with the IMF, which has caused untold poverty throughout the world, for 60 years we’ve seen the IMF’s effects, it doesn’t work – just take a look at the destruction the IMF is wrecking on Iceland? The IMF has forced interest country’s interest rates up to 18%, whilst the rest of Europe’s rates are heading towards zero, on top of that there will be extensive privatisation schemes – what’s that going to do for the citizens of Iceland? And Iceland’s a relatively rich country compared to others the IMF has tortured.