The Development and Reform of the Modern International Financial System

The international financial system might be said to be in crisis. It requires frequent
intervention by central banks and other national and international bodies to reduce fluctuations
of currencies. It does not tend to eliminate current account deficits or surpluses; exchange rate
fluctuations do not lead to movements toward balanced trade, nor do they appear to follow
from flows of international reserves: some countries run persistent surpluses while others run
persistent deficits.

This paper first examines the functioning of the modern international financial system
in order to design a reformed system that will make it easier to deal with some of the
problems that face the international financial system today. The paper advocates reformation
of the international financial system along the lines of Keynes’s famous bancor proposal.
Most importantly, the reform would eliminate the current bias toward “austerity” that results
from the way in which existing international financial institutions operate.