Re-Solving Keynesian Economics With Emerging Crypto-Economics (ie Bitcoin)

This writing re-examines Keynesian economics with the premise that Bitcoin is a necessary technological advance needed to bring our global economy into order. The suggestion or conclusion is that Keynes’ proposal for a Bancor as a global unit of settlement, which was effectively rejected and replaced with the IMF, was intended to produce the exact same result that would transpire if bitcoin were to arise as a commodity money (ie neo gold standard) as the result of George Selgin’s concept of freebanking inspired by the end government/central banks’ monopoly on money issuance.

Some Useful Definitions:

Means Versus Ends

We can re-solve a division between proponents of capitalism and communism by pointing out that capitalism is the means to the communist ideal (end) and that communism is a means leads to tyranny.

Altruism Versus the Selfish Pursuit

It is not from the benevolence of the butcher, the brewer, or the baker that we expect our dinner, but from their regard to their own interest.~Adam Smith, TWON

Adam Smith observed that an efficient economy is able to be represented by pure selfish pursuit of the individuals that make it up. The selfish pursuit is therefore the means to the altruistic ideal (ends). It is conversely implied altruism as an equivalent to communism (as a means) leads to an inefficient end.

Evolution Versus Intelligent Design

The theory of evolution explains how phenomena arise over time in terms of accidental growth whereas a theory of intelligent design would explain how such phenomena would come about from the perspective of a designer and a conceived design (ie forethought). In the essay Shelling Out Nick Szabo shows how our complex economic systems and institutions necessarily arise from evolution and not intelligent design as they are too complex and cutting edge to arise from mere forethought.

Non-cooperative Versus Cooperative Solutions/Phenomena

A non-cooperate phenomenon or proposed solution can be shown to be stable whereas (at least often) a cooperative solution or phenomenon suffers from the possibility of defection from one or more of the involved parties.

Politics Versus Science

I began to intellectually reject some of the delusionally influenced lines of thinking which had been characteristic of my orientation. This began, most recognizably, with the rejection of politically oriented thinking as essentially a hopeless waste of intellectual effort. So at the present time I seem to be thinking rationally again in the style that is characteristic of scientists.~John Nash

Politics cannot necessarily function on a scientific or logically ideal basis as there may be many complex factors that are not properly represented in the scientific models which are used to model real world problems.

Political choices must appease the ignorant masses and can be too complex to properly explain to a general population (which is made of up individuals each fully consumed with their own daily pursuits). Selfish interests of different parties (down to the individual) must be considered and it is not always possible to move in a theoretically optimal direction because of these considerations.

A scientist could get lost trying to “sell” an optimal conclusion/policy to a politician, a political regime, or a population, with no consideration to these points.

Long Term Versus Short Term Perspective

Political policies that aim to give positive short term results will be favored by politicians who have constituents that judge (ie vote for) them based on the short term.


Many mainstream economists take a Keynesian perspective — emphasizing the importance of aggregate demand — for the short run and a neoclassical perspective — emphasizing the importance of aggregate supply — for the long run.~Khan Academy

We can find a brief primer to the Keynesian perspective here:

The Keynesian perspective (short term) flips the classical perspective (long term) on its head:

Keynes’ Law states that demand creates its own supply.

Say’s law states that supply creates its own demand.

This effectively gives supporters of short-term perspectives (ie political agendas) an academically based argument regardless of the long-term effects.

The Bancor

In English, a universal currency valid for trade transactions in all the world. Everything else in the plan is ancillary to that. Serious tariff obstacles, though we may try to abate them, are likely to persist. But we may hope to get rid of the varied and complicated devices for blocking currencies and diverting or restricting trade which before the war were forced on many countries as a superimposed obstacle to commerce and prosperity.~Keynes Proposal (

Near the end of WWII Keynes conceived his idea called a Bancor (a name inspired by the French banque or (‘bank gold’)) an international unit of settlement. Here we find summaries of the concept:

The basic idea is simple. Countries should hold accounts that would have the same role as reserves,mainly gold in the early 20th century and dollars or other foreign exchange reserves nowadays. With the account, at the International Clearing Union, countries do not have to shore up these reserves.

They are free to borrow from the International Clearing Union in times of need and lend if they export more than they import. The deflationary bias caused by trapped reserves, which cannot turn into effective demand, would vanish. Keynes also mentioned some measures to prevent a piling up of credits or debits so the system should lead to self-equilibrium in the long run.

A 7 point summary of Keynes proposal:

de Vegh (1943) summarises the purposes of the Plan to seven point:

1. “[. . . ] an instrument of international currency to make bilateral arrangements superfluous,

2. an orderly method of determining foreign exchange values,

3. a quantum of international currency that is subject to deliberate expansion and contraction,

4. a stabilizing mechanism to exert pressure on countries whose payments tend to become unbalanced,

5. starting off every country after the war with a stock of reserves appropriate to its importance in world commerce,

6. a central institution to support other international institutions,

7. a means of reassurance that methods of restriction and discrimination will be unnecessary.”

Keynes’ proposal was designed to take the ability to impose international economic pressure out of the hands of dominating economies:

No country would be able to charge seigniorage to any other country, ”[i]n other words, countries would not need to buy — with goods — the currency of one particular country” (Costabile, 2007, p. 21). Nor could the key currency country change its wealth position by changing the exchange rate, because there would be no key currency country. No country will be able to nominate foreign debt in its own currency, but in Bancor, because countries will be in debt or credit with the Currency Union and not with a particular country.

Costabile (2007) summaries Keynes symmetric monetary system:

(i) the link between the gold and international liquidity is severed, in the sense that the

distribution of international liquidity becomes independent from the distribution of gold

reserves among countries;

(ii) national currencies stand on par, since none of them is

allowed to work as the international currency;

(iii) finally, any remaining imbalances between countries (now made symmetric by the operation of the system), would be kept under control via the penalties envisaged by the Plan.

Only the combination of these measures gives rise to international symmetry, while each measure taken in isolation is unable to generate this result. (Costabile, 2007, pp. 20)

Keynes proposal spoke to the British parliament and policy makers. It admitted that Britain was not in the most favorable position and that (honest) negotiation should be started before the war ended and the alliance versus Germany dissipated.

The Bretton Woods Conference, The Creation of the IMF, and Why Keynes Lost Out

As of 2016, the fund had SDR477 billion (about $668 billion)~

The Bretton Woods Conference was called to create a post war settlement system in order to help transition to the global economy to a well functioning post war state. Keynes wanted the establishment of a politically neutral supranational settlement system but the end result was far from politically neutral:

The Bretton Woods system was based on the proposals of John M. Keynes and Harry Dexter White, but mainly White’s proposal came into force. According to Boughton (2002) it was more a political decision than a decision based on economic theory. White´s proposal was in favour of monetary policy and price stability but keeping all authority by the national governments. Keynes´ proposal, on the other hand, called for more dramatic changes and would give away part of local authority to the ’International Currency Union’, even their governors would be nominated by member countries~

The International Monetary Fund was created which did not properly represent the means to Keynes’ end. It ultimately raised the USD to reserve currency status and gave the USA all of the power which Keynes meant to decentralize with his concept of an International Currency Union.

Later this system collapsed shortly after another settlement currency/system was birthed, the SDR (notably similar to Keynes concept of a Bancor):

The SDR was created by the IMF in 1969 as a supplementary international reserve asset, in the context of the Bretton Woods fixed exchange rate system. A country participating in this system needed official reserves — government or central bank holdings of gold and widely accepted foreign currencies — that could be used to purchase its domestic currency in foreign exchange markets, as required to maintain its exchange rate. But the international supply of two key reserve assets — gold and the US dollar — proved inadequate for supporting the expansion of world trade and financial flows that was taking place. Therefore, the international community decided to create a new international reserve asset under the auspices of the IMF.

The Settlement of Nations: Re-visiting George Selgin’s Ruritania

“A pure stand-alone DLT wholesale payment system is unlikely to match the net benefits of a centralized wholesale payment system,” the Bank said in a report.

Payments Canada, which runs the national interbank payment system that clears more than C$175 billion ($130 billion) a day, helped conduct the trial with assistance from Canada’s largest banks.

“DLT is probably not going to push the current systems out of the way,” Bank of Canada’s Grahame Johnson said at a presentation on Jasper in Toronto.

George Selgin’s thought experiment on free banking in Ruritania explains how the potential for efficiency via settlement through clearing houses arises naturally:

Because notes from one town come to be accepted in a distant town at par, there is little reason to lug around commodity money any more. This, too, can be seen in history. As par note acceptance developed during the 19th century in Scotland, Canada, and New England — places where note issue was least restricted — gold virtually disappeared from circulation. 21 In England and in the rest of the United States where banking (and note issue in particular) were less free, considerable amounts of gold remained in circulation.

Settlement among nations requires secure long term contracts, historically effectively represented by gold, creating the same need for a similar system of transport free international clearing.

Such a system would allow the formation of internationally created long term contracts. Keynes had exactly this in mind when he was coming up with his Bancor proposal:

Many countries, including ourselves, will find a difficulty in paying for their imports, and will need time and resources before they can establish a re-adjustment. The efforts of each of these debtor countries to preserve its own equilibrium, by forcing its exports and by cutting off all imports which are not strictly necessary, will aggravate the problem of all the others. On the other hand, if each feels free from undue pressure, the volume of international exchange will be increased and everyone will find it easier to re-establish equilibrium without injury to the standard of life.

An international clearing house, regardless how it arose (provided it functioned properly), would give nations that develop surpluses a mechanism and the incentive to invest in nations with struggling economies thereby raising the output of the entire global economy.

Re-solving Keynesian Economics with Bitcoin Via George Selgin

We can now see that the Keynesian ideal (end) is actually inline with neoclassical/capitalist ideal (an end, with free banking as a means) which seeks to create a monetary equilibrium between the currencies used and their respective underlying economies. However, the IMF was NOT the means by which Keynes proposed such an equilibrium was to be upheld or brought about.

A letter from the 2009 governor of the PBOC affirms the failure of the IMF as a proposed solution to the problem of our global economy:

The outbreak of the current crisis and its spillover in the world have confronted us with a long-existing but still unanswered question, i.e., what kind of international reserve currency do we need to secure global financial stability and facilitate world economic growth, which was one of the purposes for establishing the IMF? There were various institutional arrangements in an attempt to find a solution, including the Silver Standard, the Gold Standard, the Gold Exchange Standard and the Bretton Woods system. The above question, however, as the ongoing financial crisis demonstrates, is far from being solved, and has become even more severe due to the inherent weaknesses of the current international monetary system.

Nick Szabo, a leading authority on bitcoin and smart contracts, proposed a design for a unit of value which can be seen as a precursor to bitcoin. Szabo and Hal Finney seem to have a vision which suggests bitcoin might eventually be used much like Keynes’ idea of a Bancor. Finney, as one of the most early developers of the bitcoin project, suggested Selgin’s works supports this idea as a product of natural order as explained in a previous article:

George Selgin has worked out the theory of competitive free banking in detail, and he argues that such a system would be stable, inflation resistant and self-regulating.

I believe this will be the ultimate fate of Bitcoin, to be the “high-powered money” that serves as a reserve currency for banks that issue their own digital cash. Most Bitcoin transactions will occur between banks, to settle net transfers.


Keynes was seemingly an intelligent and benevolent man whose proposal and insights seem to have been harshly and unfairly criticized by those that themselves largely do not understand what was being proposed by Keynes and the difference between the system that was actually adopted.

He seemed be a master of propriety mixed up in a political world trying to give the most honest and proper advice knowing that politics is its own game. Nonetheless the optimal theoretical conclusion is not always perfectly palatable for the politician or even the associated constituents that might favor or disfavor the politician based on their chosen platforms and policies.

Keynes’ proposal fell short in this regard.

What was formed as the Bretton-Woods agreement was seemingly exactly opposite of the outcome Keynes was aiming for.

Keynes plan called for a level of cooperation and understanding among nations especially from the USA . He argued the advantages of cooperation outweigh the outcome of not cooperating in this regard:

There are one or two other ways of effecting this. For example, U.S.A. might redistribute her gold. Or there might be a number of bilateral arrangements having the effect of providing international overdraft.

These advantages of the proposed International Clearing Bank are surely so great that they overshadow most reasons of objection on lesser grounds.

This might have been where Keynes proposal failed. From a rational self interested standpoint it’s not necessarily possible for a nation or its leaders to adopt a proposal with such a leap of cooperative faith. Keynes plan relied at least partially on altruism as a means to an altruistic ends.

However, with the advent of bitcoin we have an interesting opportunity to revisit the ideal (end) of Keynes proposal with the suggestion that George Selgin’s work’s perfectly explains how a free banking environment (which bitcoin unleashed with its birth) would cause bitcoin to rise to become a commodity money (ie a neo-gold standard) effectively making it a perfect equivalent of Keynes notion of a Bancor-an international monetary/settlement unit.

All of the proposed rules and regulations that Keynes organized as a means to his ends would be upheld by natural forces rather than by a governing body (which might use such an institution to assert bias economic or political pressure).

As this unit becomes a worthy facilitator of international settlement we should expect a global monetary equilibrium to ensue in regard to all of the respective national fiats that exist today or would exist at such a time in the future. The ultimate result being an even higher level standard for value as described by John Nash in his various lectures and writings on the topic of Ideal Money.




Get the Medium app

A button that says 'Download on the App Store', and if clicked it will lead you to the iOS App store
A button that says 'Get it on, Google Play', and if clicked it will lead you to the Google Play store