Bancor

Bancor is the name of a supranational money proposed by Keynes in his plan (hereaf- ter KP) at the Bretton Woods conference in 1943-44. The original idea can be found in Keynes's Treatise on Money (1930 [1971]), in which he argued that the ideal solu- tion for the international monetary system is the constitution of a supranational bank for national central banks (ibid, p. 358). Being conscious of the difficulties of realizing this project, Keynes based his plan on five fundamental principles, namely gradual- ism, banking approach, symmetric responsibility of adjustment, complementarity, and multilateralism.

The gradualism principle satisfies the need of accepting lower degrees of supranational management to make it more politically acceptable, but leaving the road open to future improvements: "Is the system of supernational currency management of the future to be born ready-made or gradually evolved? Probably the latter" (Keynes, 1930 [1971], p. 354). To realize the best compromise on this ground, the KP proposes an International Clearing Union (ICU), which runs a supranational settlement system for the payments between national central banks. The balance sheet of the ith central bank expressed in its own currency is therefore:

\( D +G +OR =B +OD \ \ \ \ \ (1) \)

On the assets side, D represents domestic assets while international reserves include bancor, gold (G) and other reserves (OR). Each central bank can open an account in bancor at the ICU in exchange of gold, at a fixed but adjustable rate of exchange. The convertibility rule is only one way, from gold to bancor. Hence the bancor system favours the gradual demonetization of gold, leaving the total amount of international reserves unchanged. On the liabilities side, B denotes the monetary base and OD denotes over- draft facilities obtained from the ICU when the central bank has depleted its stock of bancor. This credit opportunity introduces the principle of the banking approach in the ICU operations. The aggregate balance sheet of the ICU is therefore:

\( G_{ICU} + \sum OD =\sum bancor\ \ \ \ \ (2) \)

where the liabilities side records the total amount of bancor accounted to the participat- ing central banks (to simplify, we suppose equal to one all the exchange rates between bancor, gold and national currencies). The assets side shows the two channels of bancor creation: gold substitution \( (G_{ICU}) \) and the total overdraft \( (\sum OD) \) of bancor borrowed from the ICU.

The overdraft channel has important consequences. First, the total amount of inter- national reserves increases as much as central banks of deficit countries use OD facili- ties to pay central banks of surplus countries, whose bancor deposits increase. Second, bancor balances are created endogenously, depending on the evolution of international imbalances that could determine OD increases or repayments. This feature characterizes the ICU as an institution less powerful than a supranational central bank that controls exogenously the amount of international liquidity.

The endogeneity of bancor could fuel a potential risk of inflationary bias. Such risk is minimized by the assignment to the ICU of the surveillance on the application of the rules of the game. The main rule is founded on the principle of symmetric burden of adjustment as "a significant indication that the system looks on excessive credit balances with as critical an eye as on excessive debit balances, each being, indeed, the inevitable concomitant of the other" (Keynes, 1943 [1969], p. 23).

In the KP, excessive positive and negative bancor balances that deviate from estab- lished quotas are discouraged by penalty interest rates. However, the participation of creditor countries in the adjustment process poses the greatest challenge. They must be convinced to accept bancor balances in the short run, but not to hoard them in the long run. In stressing the need to share the burden of adjustment, Keynes trusted on the best compromise between domestic full employment and international stability: it is "the simultaneous pursuit of these policies by all countries together which is capable of restoring economic health and strength internationally" (Keynes, 1936 [1973], p. 349).

However, the KP recommends no blind application of the rules of the game. The shared responsibility of adjustment does not necessarily mean simultaneous adjustment. The sequence of adjustment must be dictated by the need "to offset deflationary or inflationary tendencies in effective world demand" (Keynes, 1943 [1969], p. 20). Even the sterilization of the monetary base (B), through the compensation of undesired changes in bancor deposits with domestic assets (D) in the central bank's balance sheet, could be acceptable in the short run to allow enough time for the adjustment process.

According to the complementarity principle, in the KP national currencies retain their function of international reserve assets for intervention in foreign-exchange markets. However, complementarity must be matched with the principle of multilat- eralism. While international reserves held in national currencies imply bilateral credits vis-à-vis debits of the issuing foreign countries, bancor balances are a multilateral asset vis-à-vis the ICU. Multilateralism has two stabilizing outcomes. First, central banks gain one degree of freedom in their reserve allocation. For example, they can substi- tute US dollar-denominated reserves, selling US Treasury bills, with bancor balances at the ICU. Second, the key-currency country (the United States) faces an external balance constraint related to the deterioration of its bancor position. In our example, the ICU records more bancor balances for the creditor-country central banks and fewer bancor balances (or more OD) for the US central bank (Fed). The Fed could sterilize its bancor constraint with more domestic assets (D). But in this case monetary sterilization would be a deliberate non-cooperative action, while in the US dollar standard system the sterilization is an automatic privilege. This is a key result of the KP that has been underscored.

The bancor was not adopted at the Bretton Woods conference, because the US dollar was the currency of the dominant country, which at that time was the largest net credi- tor in the world. Since then the situation has completely changed, with new emerging creditors and the United States as the largest debtor country. In the current polycentric world, a supranational management of the international monetary system appears increasingly necessary and the principles of the bancor in the KP are still crucial in this regard.

See also:

Bretton Woods regime; International Monetary Fund; International settlement institu- tion; Keynes as monetary adviser; Keynes Plan; White, Harry Dexter.