New Economy Journal

Trade Imbalances, Foreign Debt and the Need for an International Currency

Volume 2, Issue 3

June 9, 2020

By - Gavin Tang

Piece length: 2,576 words

Cover photo by Christine Roy on Unsplash
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Note from the author: This article is a shortened version of an original which discusses closely related issues, and also gives a more nuanced and complete presentation of the ideas discussed here. The article can either be accessed online or by writing to the author.

A brief introduction

In principle all countries should be able to insulate themselves from the depredations of international capital. No country would sanely wish to sabotage its trade in goods and services, but its monetary and fiscal policies, industrial relations, and so on should not be subject to the activities of profit-seeking speculative capital. The advocates of ‘free market’ are correct if the market in question is actually in goods and services; but speculative capital should not be roaming around and destroying economies. A proper international currency can achieve both aims: not interfere in the trade of goods and services, and totally inhibit international speculative capital.

Countries (i.e. citizens of all countries) can insulate themselves from international capital by promoting and using an international currency unit which gives absolutely no advantage to any country, no matter how rich, nor to any other parties such as the banking conglomerate that makes up the Federal Reserve, hedge funds and so on.

The question is: how can we create an international currency that can deal with these issues? Such a currency must have a number of qualities:

  • The currency must inhibit all speculative currency exchanges because of the costs involved.
  • At the same time, these costs, like a small GST type tax, must not inhibit trade in real goods and services.
  • The currency should be extremely easy to understand.
  • The implementation of the currency must be hiccup- and hazard-free and must not allow currency traders to wreak havoc in the period leading up to its introduction (like George Soros did prior to the introduction of the Euro)

Killing off the speculative trade in currencies

To begin with, let us understand that when there is purchase of imports which requires the purchase of a foreign currency, the purchasing currency depreciates in value, which is to say, it does not buy as much foreign currencies as it formerly did. The price of the purchased currency is bid up; the price of the purchasing currency bid down. (This process happens when there is a floating exchange rate mechanism, which is the near universal mechanism applicable today. There is also a fixed exchange rate mechanism which will not be discussed.) A depreciated currency then works to inhibit further imports and encourage exports because the purchased currency becomes more expensive to buy, and the purchasing currency becomes cheaper (from a foreign currency’s point of view). This is a self-regulating mechanism which in physiology is called homeostasis. Speculative trade in currencies upsets this self-correcting mechanism.

The Global Policy Forum asserts that in 2011 only 0.6% of foreign exchange could be traced to genuine international trade in goods and services. The rest (99.4%) was for speculative purposes. These speculations distort the appreciation/depreciation effect that imports and exports have on the value of the currency, because such currency trades dwarf the trade in imports and exports.

When ‘foreign investment’ money comes into a country (as the saying goes) foreign currency is traded for the local currency at the currency market. One party exchanges currency with another party at the currency exchange market. No extra money comes into the country. In other words, the money used for ‘foreign investment’ purposes was already within the banking system of the currency - it was only in different hands. The country, or the currency, did not need external/foreign investments. If one has this understanding under one’s belt, then one should have no reservation for killing off all trade in currencies except those for the purchase of goods and services.

It is very easy for any government to unilaterally kill off speculative or foreign investment trade in its currency. The idea is not a new one, although I would like to build on the original idea. In the early 1970s the economist James Tobin, suggested a tax on all spot conversions of one currency into another. This idea became known as the Tobin tax. Hypothetical studies have shown that the Tobin tax, if set at a low rate of just 0.1% will stop a considerable amount of speculative currency trade[1]. I would suggest a 3% rate. 3% might sound outrageously high but compared to current GST or VAT rates, it is minor. A 3% tax on a currency exchange – and a 6% tax on a round trip into involving two currency exchanges – will absolutely kill of any vestige of speculative currency trade with no deleterious effect on the trade of goods and services.[2],[3]

Bancor: Keynes’ proposal for an international currency

Part of the more philosophical argument for an international currency centers around the fact that one country, or super-national entity like the Eurozone, enjoys the right to print a world reserve currency. It means that the world reserve currency’s value is subject to the fiscal and monetary policies of that currency. The U.S. government gets away with its outrageous deficit spending on the military only because the U.S. dollar is a reserve currency.  Within this framework one can see the need for an international currency.

Another problem with a floating exchange rate is that, as it stands, it is dependent on speculators to determine a ‘market value’ for each currency. Some people might be fine about the ‘technical efficiency’ of this process but there is something morally absurd that speculators determine the value of a thing that we use every day.

The idea for an ‘artificial’ international currency is not new (in fact all currencies are artificial things). John Maynard Keynes put forward the idea of such a currency, called Bancor, as part of the Bretton Woods conference of 1944 that was to shape the financial and trade order of the post war world. I have a proposal that I believe is a modification and extension of his Bancor that is both: 1) very easy to understand and 2) very easy to implement - on the assumption that central banks are institutions for-, by-, and of the people.

Under Keynes proposal, the Bancor would be managed by a new institution — the International Clearing or Currency Union. All international trade would be measured in Bancors. Exporting would accrue Bancors, importing would expend Bancors. Nations were to maintain a Bancor account close to zero, with a small amount of interest charged on surpluses and deficits to discourage such trade imbalances. The Bancor would be related to national currencies through a fixed, but adjustable, exchange rate.

I have a few problems with this proposal as it stands:

  1. For nations to maintain a close-to-zero Bancor account, they may have to resort to drastic short term policies to adjust their imports and exports – taxes, tariffs, subsidies, interest rates, central bank purchases and sale of foreign currencies, etcetera. These measures are clumsy and some will be very disruptive to commerce and trade.
  2. There is no suggestion that is simple and straightforward for establishing the initial value of Bancor and maintaining it thereafter. It has been suggested that the IMF Special Drawing Rights (SDR) be used as such a currency but SDRs are complicated, being based on a basket of international reserve currencies. It is also morally problematic that a national currency makes up a part of the value of the SDR.

An easy to understand, highly workable international currency

My proposal, I believe, solves the above issues attendant with the Bancor. Like any other currency, an international currency can be created ex nihilo. I shall show how it can actually be effected without creating chaos at its birth.

Let’s say the international currency is simply called the international currency unit – ICU. The average volume of trade in each national currency for a certain period – say 30 days – is tracked and noted. Assume that ICU will be implemented on midnight of New Year’s Eve of 2024. At that very minute (or second), a designated reserve currency – let’s say the Euro – is nominated as the benchmark for the initial value of ICU. In other words, the ICU is given the same initial value as the Euro. The European Central Bank is credited with 30 trading days’ worth of Euro in ICU equivalent. Let’s call this quantity of ICU credits the ‘float’ – not unlike the float that businesses have in their cash register at the start of each trading day.

The ICU is initially on parity with the Euro, i.e. one-to-one. All other central banks will also be credited with 30 trading days of their currency in ICU, so that they have their own float. The initial exchange rate will be set using the value of that currency against the Euro at midnight of New Year’s Eve 2024. Thus for example, if the Australian dollar is 2.156 against the Euro at that moment, the Australian dollar will start off at that exchange rate against the ICU. The 30 days trade in the Australian dollar will now be credited to the Reserve Bank of Australia in ICU as the float, with the exchange rate of 2.156 dollars against the ICU. (For example, a 30 days trade of $15.376 billion AUD becomes 15,376,000,000/2.156 = 7.132 billion ICU)

After the initial valuing of the ICU at parity with the Euro, the ICU is now not pegged to any currency including the Euro. If the Eurozone has a tendency to import more than export over a given period and its holding of ICU is substantially lower than its float, then the exchange rate must be adjusted down, i.e. the Euro devaluated against the ICU, in order to correct its trade imbalance. The European Central Bank and all other central banks have to adjust their exchange rates so that their ICU account comes back to somewhere near the float.

A few points to note:

  • In the past, governments and central banks have tinkered around with all kinds of measures to keep their exchange rate fixed. These measures included buying and selling currencies, and then borrowing them from other central banks if they ran out. With ICU, the reverse happens: the exchange rate is adjusted to maintain the same quantity of reserves in ICU. Unlike Bancor, no government or central bank has to utilise fiscal or monetary policies to maintain a trade balance. They can simply let private enterprise (the market) buy and sell as they wish, and adjust the exchange rate as needed.
  • The power to devalue/revalue each currency may be taken out of the hands of central banks and handed over to an ‘exchange rate management group’ of the ICU board. Working on a commonly agreed formula, the management group devalues or revalues a currency in proportion to its deviation from the float. So for instance, a 1% deviation will entail a certain measure of de/revaluation; a 2% deviation entails a stronger correction, etcetera.
  • If periodically it is seen that a country’s 30 day currency trade is considerably more or less than its ICU float, the float level can be adjusted. For example, country X has a float of 100 bn ICU but it now has an average 30 days trade of say 120 bn. Country X also currently has credits of 105 bn ICU, i.e. a 5 bn surplus. The float is adjusted to 120 bn ICU, and country X is also credited with its original surplus so that it now has total credits of 125 bn ICU.
  • Only central banks can have ICU credits. Private banks and individuals never hold it. ICUs can never be used for speculation or lending. ICUs can never be used for purchasing goods and services. ICUs can only be used to buy national currencies.
  • Exporters may choose to price their goods in their local currency; or they may choose to price in ICU even if they never receive any ICU in payment; or, if they want to provide a service to a potential customer, convert the ICU price again to the customer’s currency. (A real time posting can show the exchange rate between any two national currencies.)
  • A transaction tax can be collected on all ICU transactions. The tax will be collected in ICUs. Developing nations could get a pass on the ICU transaction tax on their currency. The tax can be spent on agencies like the U.N. or any international projects - after the ICUs are converted to the desired national currency. For example, U.N. staff will be paid in their own currency or any currency they choose. The funds to stop world poverty and reverse global warming are easily there for the global society if the transaction tax is set at 3%.The ICU Treasury, run as a truly international entity, will also have its own float to which the ICU tax goes. Broadly speaking, it will be spending as much money as it collects in taxes.
  • A 3% rate of transaction tax will prevent any remaining vestige of currency speculation. One would have to anticipate a greater than 3% change in a currency’s value to bother thinking about buying a currency on speculation (6% if a round trip is considered).


  • [1]     At 0.1% round trip (where a currency is purchased and then resold back to the original currency) equates to a 0.2% tax. If interest rates stand at 4%, 0.2% equates to over 18 days of interest. The high turnover of currencies in the speculative currency trade cannot tolerate these kinds of losses. Tobin’s original off-the-cuff suggestion of 0.5% tax rate would equate to three months’ worth of interest foregone. See endnote [2].
  • [2]      ‘A Tobin Tax of only 0.1% would raise, it has been calculated, something over $50 billion a year in revenue - even assuming that the number of current foreign exchange transactions fell by half, that 20% were exempt and that another 20% of the tax was evaded. This is over double the total now spent on stabilisation programmes, development and humanitarian aid, peace-keeping operations and other activities by the UN and its agencies.’ – From a paper issued by the European Parliament,
  • [3]      Based on digital technology, a new form of taxation, levied on bank transactions, was successfully used in Brazil from 1993 to 2007 and proved to be evasion-proof, more efficient and less costly than orthodox tax models.

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