[An excerpt from the book’s chapter about Keynes’ “International Clearing Union” and its “supranational” currency “bancor”.]
The International Clearing Union would supply international liquidity by allowing each member overdraft facilities expressed in bancor. The amount of bancor available to each nation – its “quota” –would be matched to the size of its economy. Since the liquidity would be created by the system as a whole, the creation of bancor would not favour one nation over another.
While the bancor would not discern itself in its everyday use to measure, exchange and store value, there still is a surprising and remarkable difference in its underlying character, caused by the process of its creation through the Clearing Union and the rules applied to its members: the assured availability of liquidity.
In today’s monetary systems, liquidity can become scarce due to its uneven distribution amongst market participants and the possibility of a “credit crunch”: The currencies we are using today are created through credit which can only be granted after a security has been put up as collateral. Hence, the availability of liquidity depends on the possibility to grant credits. This in turn leads to an unwanted characteristic of our current monetary systems that is aggravating boom and bust cycles: we have most liquidity, when least needed and least, when most needed: in times of crises. In extreme cases, this can result in a so called “credit crunch”, causing economies to fall into crises not primarily due to a lack of demand or supply, but due to of a lack of liquidity. In todays credit based currency systems, expanding the liquidity beyond the collateralised credits would amount to counterfeiting or dropping money from a helicopter.
In the case of the bancor, the situation would be quite different: due to the rules of the International Clearing Union, its members would be forced to maintain an equilibrium with the system. Hence, the liquidity could not be as unevenly distributed as we find it to be the case in our current monetary order and the International Clearing Union could therefore simply change the amount of available liquidity at all times by increasing or decreasing the quotas of its members. Other than in a credit based currency system, increasing the liquidity in a barter clearing system only amounts to putting its participants into a position to demand from each other as much as they are each capable to supply in return. (If I spend a banknote that was dropped from a helicopter, I am not entering any obligation to the monetary system; if I spend a bancor that was credited to me, then I am entering the obligation to supply an equal amount in return.)