1) The ICU plan proposed by Keynes in 1944 involved establishing an international clearing union that would issue a global reserve currency called bancors and manage countries' trade balances. 2) Under the ICU plan, countries would deposit bancors from trade surpluses into a national account and withdraw them for trade deficits, facing penalties if their balances exceeded a certain threshold. 3) The goal was to incentivize balanced trade by recycling trade surpluses from some countries into productive investments in others, in order to prevent severe global trade imbalances and financial crises.

1. ICU script

2. pt1
• Plan by Keynes in 1944 rejected at the Bretton woods conference (planned
for the post war reconstruction of the world economy- three institutions
that are with us still today).
• Plan for the ICU stemmed from three core principles;
• 1. in his words, ‘the equality of credits and debits, of debits and liabilities’;
like a central bank working at an international scale with a completed
balance sheet of trade between nations.
• 2. International monetary settings tend to ‘throw the main burden of
adjustment on the country which is in the debtor position’; seen today in
the interactions between Germany and Greece; expected to improve their
fiscal position- very difficult if trade imbalances within Europe continue to
persist (as I’ll explain later if you’re not sure).
• 3. Finally; ‘the problems of debtors can only arise if creditors are not
choosing to make use of the purchasing power they have obtained’ i.e. if
the excess savings earned by nations with a trade surplus are not used in
productive ways abroad – often as a result of excessive trade imbalances.

3. pt2
• Worked like this;
• The ICU would issue Bancors (value tied to gold) as a new foreign
reserve currency used by central banks (valued against all other
individual currencies at an agreed amount).
• A country would withdraw Bancors from the ICU whenever it
needed to pay for imports and deposit Bancors whenever it
exported goods (instead of turning to international markets.
• In the ICU each country would hold a national account- a kind of
balance sheet with a maximum number of Bancors that can be
deposited or withdrawn from its overdraft facility (measured by its
average trade volume over a period of 3 years).
• The overdraft facility can also be used to finance expansionary
policies in times of a shortcoming of domestic demand or cyclical
crises.

4. pt3
• Incentives to keep a trade balance close to 0 Bancors
• When country is in debit or credit to the union (i.e. a negative/positive number of
Bancors in its account) in excess of a quarter of it’s average trade volume (it’s quota), it
will pay a rate of 1% on it.
• If a country exceeds half its quota (whether or not this is as a result of a trade surplus or
deficit), it will pay a rate of 2%, and the governing body will force a country to take
necessary action to adjust its trade balance
• For surplus nations; 10% charge on their overdraft facility, currency appreciation,
controls on capital inflows whilst abolishing controls on outflows (make sure global
demand isn’t suppressed), lowering tariffs, measures to expand domestic credit and
demand, international loans for the development of poorer nations. If by the end of a
year their deposits still exceed half of its average trade volume, in effect the value of
their trade surplus will be confiscated entirely.
• For deficit nations; the inverse; currency appreciation, controls on capital outflows,
higher tariffs, lower wages; big one; productive investment, financed by the ICU’s
revenues earned from surplus nations.
•
• Therefore, the ICU would act as what some including Yanis Varoufakis call a Global
Surplus Recycling Mechanism (or GSRM)

5. pt4
• World economy-tough problems, the root causes can be traced back to huge trade
imbalances. Many surplus nations pursued domestic policies that deliberately create huge
amounts of excess savings especially in East Asian countries; creating an undervalued
currency, freezing wages and lowering interest rates which charges more to households but
less to exporters and firms – representing a shift of resources away from domestic
consumption, into the tradable goods sector who amass savings which they cannot use to
invest in the domestic market because falling household consumption means there is a lack
of effective demand which justifies this, so the excess savings held are invested abroad
instead.
• Once these excess savings were great enough (caused by an excessively high trade surplus)
the big deficit nations (U.S) began to develop real estate bubbles and consumer credit binges
since opportunities for productive investments abroad run dry, and the huge capital exports
from surplus nations instead go into unproductive investments and credit bubbles. Once a
run on the banks began, there was unemployment everywhere, even in surplus nations
where firms fired workers because the supply of their goods and services exceeded demand.
Hardest hit were deficit nations, especially those on Europe’s periphery where the lack of a
fiscal union compounded the problems in countries where stimulus was necessary.
• Today, the US can no longer absorb the world’s surpluses and the effect of its long held trade
policies on private consumption has meant it cannot continue to invest in order to stimulate
demand without inflating the real estate bubble or stock market (until recently).

6. pt5
• Illustrates the relationship often misunderstood in the Europe. Here we see Keynes’s original
concerns about the burden put on debtor countries.
•
• Under the proposed ICU, the governing body would be largely independent, with no one country
having control over the other. The U.S wanted to replace Britain as the new world power; wanted to
regulate post-war reconstruction themselves, recycling their surpluses where they saw fit
(Germany, japan) to create markets for U.S exports; make sure the rest of the world was dependent
on them.
• So, they saw this as unfair- didn’t want to curtail their political strength and power by restraining
their surpluses.
• Africa; especially hurt by East and Southeast Asian trade policy; they cannot diversify from raw
materials into manufacturing e.g. cotton into textiles arguably because of the competitiveness of
Asian goods. Leaves them at the mercy of international markets and commodity prices (which has
hurt them very recently).
• (read slide) Together with a global tax on personal wealth (Thomas Piketty), this could make a
formidable attempt to stop the boom and bust cycle. Inequality tends to increase excess savings,
and as discussed earlier, this can lead to crises like 2008. Also, it is the most efficient way of solving
the EU debt crisis – onetime tax on wealth across EU would rake in enough to reduce total debt by
20% of GDP, and with the ICU’s surplus recycling mechanism; this crisis would likely be prevented
from happening again in the future.