The price of Euro and US dollars Daniel Leal Olivas/Getty Images

Resurrecting Creditor Adjustment

When the Bretton Woods Agreement was hashed out in 1944, it was agreed that countries with current-account deficits should be able to limit temporarily purchases of goods from countries running surpluses. In the ensuing 73 years, the so-called "scarce-currency clause" has been largely forgotten; but it may be time to bring it back.

LONDON – With all the protectionist talk coming from US President Donald Trump’s administration, it is surprising that no one has mentioned, much less sought to invoke, an obvious tool for addressing persistent external imbalances: the 1944 Bretton Woods Agreement’s “scarce-currency clause.”

That clause, contained in Article 7 of the agreement, authorizes countries, “after consultation with the [International Monetary] Fund, temporarily to impose limitations on freedom of exchange operations in the scarce currency”; and it grants those countries “complete jurisdiction in determining the nature of such limitations.” A country’s currency is considered scarce in the foreign-exchange market if it imports more than it exports – which is to say, if it runs a current-account deficit.

The scarce-currency clause has an interesting history. In his original plan for an International Clearing Bank, the British economist John Maynard Keynes proposed an escalating range of sanctions against member states that maintained continuous credit balances (and less onerous sanctions on countries with persistent debt balances). The idea was to pressure countries to reduce their current-account surpluses. Surplus countries would not be prevented from spending their money freely, but they would not be permitted to hoard it.

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