12.06.2025

John Maynard Keynes caricature by David Low (1934)

Bancor and trade imbalances

Can massive surpluses and massive deficits be ironed out by the simple device of yet another international bureaucracy? Michael Roberts pours scorn on the idea

Donald Trump’s trade war has forced the governments of the other major economies to reconsider the whole international trading and monetary regime. The international trading ‘rules’ built up over the last 40 years of so-called globalisation have been wrecked and the international institutions (the International Monetary Fund, World Bank, UN) formed after World War II by the US (with the support of the UK) at Bretton Woods along with the World Trade Organisation, have been sidelined.

Last week, the Organisation of Economic Cooperation and Development, the think-tank of the top 30 advanced capitalist economies, met in Paris for its annual meeting. It was a sombre affair. Trump’s unilateral action on tariffs and his attempt to compel countries to cut trade deals had rattled the attendees. Trump is suggesting that international trade does not require multilateral agreements, or agencies to function or as a means to settle disputes. According to the Financial Times, the US message was unmistakable: “We’ve got a big trade deficit we need to deal with; what matters is unilateral power, which we have,” said a diplomat who attended meetings with the US trade representative Jamieson Greer. “This is the way the world is going to look, so you better get used to it.”¹

Interestingly, many leftist economists have increasingly begun to accept that Trump and the US have a point: international trade and financial ‘imbalances’ (ie, surpluses and deficits, credits and debits) are bad news for capitalism and maybe it is time to end them. You see, crises in capitalism are not caused by falls in the profitability of capital or even by ‘excessive debt’ in any one country, but instead by ‘international imbalances’: some countries run too large surpluses on trade with others and some countries have too large deficits.

Keynesianism

Robert Skidelsky, John Maynard Keynes’s authoritative biographer, writing just after the end of the great recession, put it like this:

… global imbalances played a part in causing the severe credit crunch of 2008-09. But they are also dangerous per se. They can lead to disorderly reversals, triggered by large capital movements; and they can also provoke trade restrictions. It is a fair bet that a continuation of the global imbalances of 2006 would have led to a dollar crisis or a protectionist frenzy, if the credit bubble had not imploded first. The imbalances have now decreased, but could open up again when the world economy recovers. They thus continue to be a serious potential problem.²

Now the Keynesian left have attempted to revive the long forgotten idea of Keynes in 1941 that governments should establish an international ‘clearing house’ for countries where any trade surpluses or deficits are converted into credits and debits measured in a unit of international currency - named a ‘bancor’. Such a clearing house would enable global economic stability in contrast to Trump’s anarchic trade war.

The “principal object” of the international clearing union, Keynes said, “can be explained in a single sentence: to provide that money earned by selling goods to one country can be spent on purchasing the products of any other country. In jargon, a system of multilateral clearing.” This would eliminate the need for bilateral clearing between countries. Instead, all national central banks would hold an account in bancors at this International Clearing Union (ICU) for their country’s surpluses or deficits.

The essential feature of Keynes’s plan was that creditor countries would not be allowed to hold on to the money from their outstanding trade surpluses, or charge punitive rates of interest for lending them out: rather these surpluses would be automatically available as cheap overdraft facilities to debtors through the mechanism of the ICU. Each national currency would have a fixed, but adjustable, relation to a unit of bancor, which itself would have a fixed relationship to gold as the internationally accepted measure of value.

Persistent trade surplus/creditor countries would be required to try and reduce their surpluses by revaluing their currencies and unblocking any foreign-owned investments. To force this, the ICU would charge them rising rates of interest on credits (surpluses) running at a certain level above an agreed quota. Any credit balance exceeding the quota at the end of a year would be confiscated and transferred to a reserve fund at the ICU. At the other side of the equation, persistent deficit countries would be required to depreciate their currencies and prohibit capital exports. They would also be charged interest on excessive debits (deficits) above a certain level. The target would be to achieve a perfect balance in trade for all countries at the year’s end with the sum of bancor balances (credits-debits) at exactly zero.

Keynes pointed out a problem with trying to achieve an international balance of trade. In ‘free markets’, any trade adjustment was “compulsory for the debtor, but only voluntary for the creditor”. If the creditor does not choose to make, or allow, his share of the adjustment, he suffers no inconvenience: while a country’s reserves cannot fall below zero, there is no ceiling that sets an upper limit. The same is true if private capital flows are the means of adjustment: “The debtor must borrow; but the creditor is under no … compulsion [to lend]”.

This is a problem indeed. Why should countries making trade surpluses in goods and services relinquish those monetary gains to some international clearing bank that will pass them onto those countries running deficits, in order to reduce international capital flows that (apparently) are the cause of crises in production and investment globally?

At Bretton Woods in 1944, the US was the major surplus creditor and US representative Harry Dextor White vetoed Keynes’s bancor plan. Now in 2025, it is China and Europe that are the surplus creditors and the US is the huge deficit nation. But would Trump or China support losing control over the distribution of the income from trade to an international bank run by some supposedly neutral group of bureaucrats?

No balance

In 2025, both Trump and the Keynesians accept that imbalances in trade must be eliminated - Trump because he wants to sustain the global dominance of the American economy and its multinational companies in world markets; and the Keynesians because they think international trade and monetary imbalances are the cause of global economic instability.

Some Keynesians go so far as to accept the argument of Trump’s Maga advisors that surplus trade countries - China in particular - are the culprits in this international instability. Michael Pettis argues that the likes of China have established trade surpluses because they have “suppressed domestic demand in order to subsidise its own manufacturing”, so forcing the resulting manufacturing trade surplus “to be absorbed by those of its partners who exert much less control over their trade and capital accounts”.³ So it is China’s (or until recently Germany’s!) fault that there are trade imbalances, not the inability of US manufacturing to compete in world markets, compared to Asia and even Europe.

Back in 2010, Skidelsky argued that “emerging countries [ie, China] … have discovered the advantages of export-led growth. This strategy has yielded many benefits for these countries, but it suffers from a fallacy of composition: the export surpluses must have counterpart deficits elsewhere.” In other words, China’s surpluses have caused the US deficit and China’s high savings have caused too much consumption in the US. Skidelsky states:

This is certainly a plausible description of events in the middle of this decade: the ‘glut’ of savings in parts of the world evoked a Keynesian expansionary response in the US, which widened global imbalances. Of course, the day of reckoning has to come in the end and has the potential to be strongly deflationary for the world, since the burden of adjustment would fall on the deficit countries.

Skidelsky is really saying that capitalist market economies do not grow in any harmonious and balanced way. On the contrary, there is continual competition between ‘hostile brothers’ in global markets. Just as in domestic markets, the stronger, the better organised, and those with more productive technology, gain at the expense of the weaker. ‘Imbalances’ are the stuff of capitalist accumulation. The idea that they can be ironed out through some macro-management organised by a central bank has not worked within countries; and it is even less likely in international markets. International imbalances are the symptom - or result - of the uneven development of many capitals competing against each other; they are not the cause of economic crises.

Indeed, Skidelsky hinted at this:

There are both ‘good’ and ‘bad’ imbalances. On the one hand, the advantage of globalisation is that it allows savings to flow to where the rate of return on new investment is highest. On the other hand, imbalances can be a symptom of distortions to the price signals in the economy, leading to unsustainable patterns of capital flows and spending that are costly to correct.

That sums up the uneven basis of capitalist economic development. Such uneven development in profitability would not disappear even if each country’s trade in goods and services was in balance with all others. There would still be an unequal exchange of value in trade, as the higher-technology economies and companies extracted surplus value from lower-technology countries and companies. The value dimension of international imbalances is totally missing from Keynesian theory.

US v China

Under capitalism, there are always value imbalances among economies - not because the more efficient producer is ‘forcing’ a trade deficit on the less efficient, but because capitalism is a system of uneven and combined development, where national economies with lower costs can gain value in international trade from those less efficient. What really worries the US capitalists (and Trump in his own way) is not that surplus countries are forcing the US to issue dollars to pay for its deficits: it is that China is closing the gap on productivity and technology with the US and so reducing the transfer of profit to the US and threatening its economic dominance.

It is the same thing with the ludicrous, but continually repeated, argument that the slowdown in economic growth in the major economies is caused by the surplus countries ‘saving too much’.⁴ If their households, companies and governments only spent more (consume, not save), the argument goes, then the imbalances would disappear and the world economy would grow faster. But it is not excessive saving by the emerging economies that is the cause of slowing economic growth in the major economies, but too little investment in the latter.

There has not been a global savings ‘glut’, but a dearth of investment. There is not too much profit (surplus savings), but too little investment. Since the 1980s, the capitalist sector in the advanced capitalist economies (the OECD) has reduced its investment relative to gross domestic product by four percentage points - and particularly since the late 1990s and after the end of the ‘great recession’. Savings to GDP in the advanced economies fell only by one percentage point over the same period.

As profitability fell in the late 1990s, investment declined and growth had to be boosted by an expansion of fictitious capital (credit or debt) to drive consumption and unproductive financial and property speculation. The reason for the great recession and the subsequent weak recovery was not a lack of consumption or a savings glut, but a collapse in investment.

Back in 2011, just after the end of the great recession, the then governor of the Bank of England, Mervyn King, argued that “there is no world government to impose “rules of the game” to internalise the externalities [ie, remove the imbalances]. So the solution can be found only in cooperation between nations … Will we create a more stable world economy? The next few years will provide the answer. And they will, as our Chinese friends say, be interesting.”⁵

Well, we now know the answer to that question. What country is going to agree to be fined or have its hard-earned export money confiscated because it has succeeded ‘too well’ in world markets? The Chinese? And what country is going to accept that it will be fined or forced to devalue its currency because it is running too large a trade deficit? The US?

Far from international cooperation looking to end trade imbalances, the major economies are facing an all-out trade war (to go along with their increasing preparations for a military war). How did the OECD annual meeting last week conclude on the chances of such international cooperation? As one observer remarked, “We’re really where we were before the meeting, which is nowhere.”⁶

The utopian idea of bancor was vetoed in 1941. If raised again by Keynesians now, it will suffer the same fate.

Michael Roberts blogs at thenextrecession.wordpress.com