Tag Archives: financial institutions

Open Letter To The West On The New World Order

Paul Jenkins – The West and a Workable New World Order?

From: Paul Jenkins

To: Global governance observers

Date: May 2, 2024

Re: The West and a Workable New World Order?

One can describe the so-called liberal world order as a set of ideas for organizing world democracies. While openness and trade, rules and institutions, and co-operative security have been the principles that have shaped the liberal order, it also required sovereign nation states to provide the foundation for the creation and development of a system of intergovernmental organizations, or system of global governance.

In the aftermath of the Second World War, the system was designed primarily for the advancement, economically and politically, of Europe and the United States. Yet since 1945 the liberal world order has evolved, giving impetus to the steady increase in global economic integration to the benefit of many nations and people. 

Advances in science and technology have been critical to the evolution of the liberal order, but there has also been a need for the structures of global governance to evolve and keep pace.

On the economic front, for example, the collapse of the Bretton Woods system of fixed exchange rates, following Richard Nixon’s 1971 decision to abandon the dollar’s link to gold, gave rise to the creation of the G7. And the Asian Crisis of 1999 led to the creation of the G20.

Throughout the entire postwar period, however, tensions inherent between the sovereign authority of the nation-state and the need for collective global governance increasingly challenged the liberal order.

Indeed, the advent of the Cold War led to the liberal world order becoming hegemonic, organized around the economic and political strength of the United States with its dominance of global governance through the various institutions making up the global governance system. 

But over the years, pushback took hold. As the benefits of global economic integration spread and the United States was no longer the singular engine of growth, both democratic and autocratic countries found voice and began to resist the principles that shaped the liberal order. Even core nations of the liberal order began to voice their concerns in the aftermath of the Global Financial Crisis as the market-based financial system failed to self-regulate (as had been advertised), and as the liberal order proved unable to provide social protection for those adversely affected by globalization.

Effectively, a new world order began to unfold, with the resulting slowing and even fragmentation [DS1] [PJ2] of global economic integration.

At the same time though, virtually all nations, regardless of regime or stage of development, are facing the same challenges: Financial instabilities, rising inequality, weak productivity growth, climate change, spread of infectious disease, AI, cyber security and on and on.

These vulnerabilities represent global risks that can only be tackled and minimized through collective action. This in turn requires a new world order that treats the world as it is, not how we wish it to be. 

What does this mean for the West, and in particular the United States and Canada?

The unique advantages of the United States are its open society, fair and law-based market economy, and allure for talent from around the world. To sustain these advantages, maintaining its wealth and its position as the centre of the free world, it cannot close its doors to further global economic integration.

Geopolitically, what might this look like?

John Ikenberry argues that the answer can be found in the principles of sovereignty, territorial integrity, and non-intervention of the Westphalian system, the 1648 treaties that ended the Thirty Years’ War and established the modern nation state. The key insight of the Westphalian system is that all countries are vulnerable to the same global risks. The leap forward in mindset that is required is the acceptance that states are the rightful political units of legitimate rule. 

For the West, and the United States in particular, this implies the need to accept these new realities, and in so doing, the need to work together to build a new world order that preserves their liberal democratic values, and those of its allies, while at the same time recognizing that the economic challenges they face are not unique to them.

The unfolding relationship between the United States and China will define whether we achieve a workable new world order.

The economic incentives are there for this to happen. 

For China, the incentive is further progress in closing both its internal income gap as well as the gap between itself and the developed world. The payoff would be setting in place the foundation for a sustained rise in living standards for all its citizens. 

For the United States, the incentive is in preserving its strength as an open society and its vision of the world that has considered the interests of others. In many respects, it remains uniquely capable of playing the central role in sustaining the global economic system.

The challenge in re-imagining such a new world order is geopolitical. The task is to renew global governance with today’s realities in sharp focus.

Paul Jenkins. Mister Jenkins is a former senior deputy governor of the Bank of Canada and a senior fellow at the C.D. Howe Institute.

Canadian Money And How Select Banks Create It

Poof!My book, Money: Whence It Came, Where It Went, tells us that “The study of money, above all other fields in economics, is one in which complexity is used to disguise truth or to evade truth, not to reveal it.

 The process by which banks create money is so simple the mind is repelled.”

Graham Towers, the first Governor of the Bank of Canada, explained the process by which banks create money: “The manufacturing process consists of making a pen-and-ink or typewriter entry on a card in a book. That is all. Each and every time a bank makes a loan, new bank credit is created – new deposits – brand new money.

John Kenneth Galbraith- mystic or curmudgeon? image: poorwilliam.net
John Kenneth Galbraith- mystic or curmudgeon? image: poorwilliam.net

Broadly speaking, all new money comes out of a bank in the form of loans. As loans are debts, then under the present system all money is debt.”

Money created by banks and other financial institutions is interest-bearing debt. They create the principal and expect their money to be returned with interest. We can’t create interest the way they create the principal, so we must obtain it from some other money that was also created as interest-bearing debt. There is never enough of this money in existence at any time to pay off all of our collective debt. More interest-bearing money must continually be borrowed into existence.

In 2013, not so long ago, the ratio of household debt in Canada, including mortgages and consumer debt, was more than 160% of disposable income after mandatory deductions and income taxes and this statistic will keep growing with each year. The federal debt in Canada then was more than $600 billion, and interest payments on the debt in 2011-2012 cost $31 billion dollars or 11 cents of every tax dollar. Now in 2019, the federal debt has grown to $768 billion.

The five largest banks in Canada reported more than $27 billion in combined net income for the 2012 fiscal year.

Canada’s central bank, the Bank of Canada, claims to “regulate credit and currency in the best interests of the economic life of the nation”, and to mitigate “fluctuations in the general level of production, trade, prices and employment”, yet the purchasing power of the Canadian dollar has dropped steadily since the Bank of Canada was founded in 1934. As a store of value the dollar has not performed very well. It should also be noted that Canadian banknotes ceased to be redeemable for gold in 1929.

Bank of Canada notes are fiat money that the federal government declares to be legal tender, and the Bank has a monopoly on the issuance of bank notes. These notes are supplied to financial institutions to satisfy public demand. Chartered banks in Canada are no longer required to maintain statutory cash reserves for the loans they make. According to some estimates, Bank of Canada notes add up to less than 2% of the total amount of loans made by the banks and other financial institutions.

Once upon a time, Canada used real paper bills for one and two dollars. The move away from paper currency is interesting. Is there a concerted effort to 'do away' with physical money? (The recent withdrawal of the penny being an example.) The penny was costing more to manufacture and distribute than its actual physical value...that's partly because it wasn't made out of pure copper- hence it became "expensive". Will the nickel be the next coin to die? Is it even made out of nickel anymore? Check back in ten years. CP

Money created as interest-bearing debt is scarce from the moment it is created, which curtails its effectiveness as a medium of exchange. Every dollar comes into existence as interest-bearing debt, and the overall cost of interest is reflected in the price of everything we buy. This is not to suggest that interest should be banned or that interest rates need to be controlled by a central bank. Anyone should be free to lend his or her savings at a mutually agreeable rate. Equity financing, with shared risks and rewards, is another option.

What is being suggested here is that we ask some fundamental questions about the monetary system and the function of money.

 Are you able to use your goods, services, labour, knowledge, skills and abilities to obtain enough money to purchase other goods and services?

Are you able to obtain credit when you need it and are also willing and able to pay it back? Are you able to negotiate an agreeable price for credit and loans? Are you on a treadmill of debt, no matter how hard you work, how many expenses you cut, or how hard you try to save?

Are your savings secure and retaining their value?

Money is basically credit, like an IOU. Our ability to exchange our goods and services should not be hampered by the price of credit or an inadequate supply of money. Anything physically possible is financially possible. We can extend credit to anyone who wants to purchase anything from us and who is willing and able to provide us with a mutually agreeable amount of his or her goods and services. In essence, goods and services pay for other goods and services.

A mutual credit clearing system is an alternative method that can be used to facilitate reciprocal exchange.

Members of a credit clearing association have a trading account where an ongoing record is kept of their sales and purchases, their credits and debits. Every transaction includes a credit entry for one member and a debit entry for another, but interest does not have to be paid when an account temporarily has more debits than credits. Credit is extended to members from the rest of the traders in the group, and the major benefit of this system is that members can obtain interest-free credit. In the long term every member is expected to provide as much as they obtain. It all balances out within the community of traders. It’s all a simple matter of bookkeeping.

Direct credit clearing systems can be operated on a fee-for-service basis to cover expenses and to compensate those who provide this service. Nobody is ever forced to join any trading group and members are also free to leave when their debts are clear. Anyone can start their own credit clearing service, which allows competition between associations based on quality and price of service. Associations can also cooperate with each other to increase the number of potential trading partners and broaden the range of goods and services that are available.

Credit does not have to be scarce or expensive. We can control our own credit and allocate it as we choose. Are your best interests being served by the money you use?   For The Silo, John Kenneth Galbraith.