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Financial regulation, Global trade, Central banking, Economic rebalancing, International Monetary Fund, IMF, Global Clearing Union


Banking and Finance Law | Commercial Law | International Law | International Trade Law | Law and Economics | Public Law and Legal Theory


Global trade imbalance and domestic financial fragility are intimately related. When a nation runs persistently massive current account deficits to maintain global liquidity as has the United States now for decades, its central bank effectively relinquishes exchange rate flexibility to become a de facto central bank to the world. That in turn prevents the bank from playing its essential credit-modulatory role at home, at least absent strict capital controls that are difficult to administer and have long been taboo. And this can in turn render credit-fueled asset price bubbles and busts all but impossible to prevent, irrespective of the nation's regime of domestic financial regulation. Counterpart remarks hold of nations that run persistently large surpluses, notably China, which now faces looming financial dysfunction of its own notwithstanding strict capital controls. If the U.S., Asian, and European economies are to emerge from and stay out of crisis, a new global legal architecture that fully melds trade, monetary, and financial arrangements, in a manner that renders the global liquidity required by global trade no longer dependent on one national currency or permanent national deficits, will be a sine qua non.

This article, which draws together three distinct sequences of articles by the author on financial regulation and central banking, economic rebalancing, and the legal underpinnings of the world economy, retrieves and updates J. M. Keynes's original International Clearing Union ("ICU") plan for what ultimately became the International Monetary Fund ("IMF," "Fund"). Part I tells the tale of Keynes's original ICU plan as advocated at Bretton Woods, emphasizing the plan's basic structure and motivations as rooted in Keynes's financially oriented re-conception of monetary and what later came to be known as "macroeconomic" theory. Part II traces recent financial, monetary, and macroeconomic troubles to our not having adopted something more like the Keynesian IMF. Part III proposes an updated version of Keynes's ICU arrangement suitable for today's international trade and financial order. In effect, it serves as a rough blueprint for a new IMF: a Fund more like the "old" one we never gave a go, and indeed more like a world central bank, a "Global Fed."

The article concludes by looking ahead to next steps in the direction of fully instituting the revived Global Clearing Union plan that it proposes. What has blocked progress until now, it suggests, might well be a tendency to segregate thought about international trade and monetary orders, on the one hand, from thought about domestic financial and "real" economies on the other hand. In counseling abandonment of those misleading segregations, the article ultimately suggests we change more than one institution. It suggests we reform a false and destructive way of thinking.

Publication Citation

Published in: New York University Journal of Legislation and Public Policy, Vol. 16, No. 2 (2013).