Using a Common Currency in International Transactions: The Post Keynesian Case for No Exchange Rates

Abstract

Confidence is fundamental for the general acceptability of money. In all international systems using convertible national currencies, foreigners can never be completely confident that the foreign currency they accept will always remain exchangeable into their own country’s currency at the current exchange rate. This is particularly the case when the foreign country runs a deficit on current account or holds very small foreign exchange reserves.

Years ago, money was an international thing; if you had the money of one country you could change it into the money of another at a fixed rate, and you never had to think which currency you held. Exchange control changed all that: before anyone accepted payment in a controlled currency, he had to discover where he could spend it and what he could buy with it. One by one the currencies of the world, like their national economies were becoming independent of one another.

J.M. Keynes, 1940, CW XXV: 3

It is characteristic of a freely convertible international standard that it throws the main burden of adjustment on the country which is in the debtor position on the international balance of payments. … The contribution in terms of the resulting social strains which the debtor country has to make to the restoration of equilibrium by changing its prices and wages is altogether out of proportion to the contribution asked of its creditors. Nor is this all. … The social strain of an adjustment downwards is much greater than that of an adjustment upwards. … The process of adjustment is compulsory for the debtor and voluntary for the creditor. If thecreditor does not choose to make, or allow, his share of the adjustment, he suffers no inconvenience. For whilst a country’s reserve cannot fall below zero, there is no ceiling which sets an upper limit. The same is true if international loans are to be the means of adjustment. The debtor must borrow; the creditor is under no such compulsion.

J.M. Keynes, 1941, CW XXV: 27–8

The problem of maintaining equilibrium in the balance of payments between countries has never been solved since methods of barter gaveway to the use of money and bills of exchange. During most of the period in which the modern world has been evolved … the failure to solve this problem has been a major cause of impoverishment and social discontent and even of wars and revolutions.

J.M. Keynes, 1941, CW XXV: 21