Way back in the twelfth century, when Italian artisans started construction of a bell tower for the cathedral of Pisa, they had no idea their handiwork would become one of the wonders of the world. Despite the fact that the leaning tower of Pisa has stood for centuries, it is not unusual for students of structural engineering to reach a point in their studies where they can no longer gaze on it with equanimity. Although the tower of Pisa has captured the awe and admiration of generations, the students, flush with their new knowledge, are seized with a barely controllable impulse to do something about it. How could it have stood all these years? How could it have been built without their skills? Why did not some government regulator stop this precarious project?

Today, it would appear that there are some people who are seized by a similar impulse when they contemplate the smoothly functioning, admirably efficient-but unregulated international Euromarkets, which Peter Drucker has called "a financial instrument that may have saved the world economy, and indeed the free-market system." Despite that accomplishment, the regulatory-minded see a free market teetering perilously,

Today, there is about six hundred billion dollars in the Eurodollar market, we think. I say "we think" because no one knows how many times the dog is counted when it runs by the door. Let me give you an example. Citibank makes a placement with Barclays in London for one dollar and Barclays places it with Credit Suisse, which places it with Societe Generale, which places it with Chase Bank. How many times did the dog run by the door? Nobody really knows: the balance sheet remains exactly the same since all any of these banks get is a cable saying charge one account and credit the other. In reality, there are no dollars overseas. They are only here, because the only place anyone can spend a dollar is in the U.S. They're traded overseas, and they're payable overseas, but there never is a problem about "all those dollars abroad." If someone wished to withdraw them all one day, he could not, because the dollars cannot leave the system, which is a closed loop.

It is a paradox that this relative freedom in the international Euromarkets exists only because of various governments' efforts to restrict such freedom. The remarkably efficient Euromarkets were produced by the actions of sovereign nations-the United States prominent but by no means alone among them-to govern and restrict the flow of capital across borders.

Britain put controls on sterling, effectively withdrawing it from international markets. The so-called Regulation Q of the Federal Reserve Board, with its ceilings on interest rates; the 1963 Interest Equalization Tax, with its prohibitive effects on the purchase of American securities issued by non-Americans, which was finally repealed in 1984; and the Foreign Direct Investment Program of 1965 had all served to drive capital into the Euromarket, where interest rates are determined by the interplay of supply and demand, not subject to the passing whims of national regulators and lawmakers.

A free international market developed out of these restrictions

The road to freedom is never easy and once lost is hard to regain. The benefits of free markets in ideas, politics, and money are plain for all to see. The rebirth of Europe after World War II is a clear and dramatic illustration of this effect. Europe after the war dismantled the controls and restrictions it had before. International trade barriers fell, exchange was relatively unrestricted, the climate for investment became freer and more hospitable. This relative freedom became the lever that enabled Europe's rebuilding to proceed at an astonishing pace. Output per person increased three times as rapidly as it had before the war. World trade increased 500 percent in twenty-five years. None of this was achieved without pain and effort-and much of it over the objections and warnings of those who thought only centralized planning could solve our problems.

It is the same whenever free and open trade replaces the

Jean Monnet, architect of the European Coal and Steel Community, recalled the founding of the community in his memoirs: "In retrospect, it is hard to realize the effect of such a change, because the new situation now seems so normal that one can hardly imagine the absurd system it replaced."

I remember vividly the debate in Europe when it was planned to dismantle the European Payments Union-a complex government clearing system for inter-European trade. The fact that a handful of foreign exchange traders could handle the greatest two-way trade in the world-at that time between Canada and the United States-astounded the experts. But the EPU was dismantled, and the market did work. In fact, very few people even remember the EPU today.

In this era, Eurodollars have accomplished miracles that the most conscientious central planners have never dared imagine, much less approach. The most dramatic demonstration of how a free international financial market can rescue the world economy-in spite of the most vigorous efforts to prevent it-occurred in 1974. At the time, you will recall, many of the world's experts, with the notable exception of Citibank, were confidently predicting that it was hopeless to expect to recycle the tremendous surpluses generated by the Organization of Petroleum Exporting Countries, because there was no formal, regulated machinery in place to handle such a task. As it turned out, the market recycled these surpluses with very minor casualties precisely because there was no formal, regulated machinery to handle this task.

One might expect that the stellar performance of recycling sixty billion dollars of OPEC surpluses would win the plaudits of the crowd, that the experts would be delighted with a herculean task well done. No such thing happened.

The spectacle of the market working so impressively, instead of inspiring universal confidence, seemed only to fan the indignation of all those who are still determined to straighten

The market remains free, offering the efficient, flexible, and prompt delivery of funds where they are needed on a worldwide basis.

For the first time in world history, the LDCs have a way out of the vicious circle of poverty and the lack of development capital. The Eurocurrency and Eurobond markets are today providing thirty billion dollars a year with no political strings to creditworthy LDCs. This has enabled some of them to achieve the unthinkable, a doubling of standards of living in ten to fifteen years.

Should the regulatory fever suddenly seize the governments of the Group of Ten nations, the result would be the same as it has been in earlier cases. Some new free market would promptly spring up outside their regulatory reach. The same actions would proceed, barely missing a step. Only the venue would have changed.

There are, however, other models we can see around us. In all of our individual countries we see examples of the futility of attempting to make water run uphill. In the U.S., educational examples are frequently provided by our Department of Energy.

A few years ago, Americans were lined up at gasoline stations waiting for gas, because the Energy Department had first ordered the refining of too much heating oil instead of gasoline, then allocated the available gasoline to the wrong places.

This is the kind of wisdom and direction that many would like to see brought to the international financial markets. So far, however, world capital markets have managed systematically to adjust and preserve the world's economic balance without waiting for governments to tell them how to do it. In fact, the markets usually are well on the way to solving a problem about the time that regulators become aware of it and start gearing up to tell us how to manage it.

Members of the international banking community are the recipients of much of this gratuitous advice. Had the financial markets followed the advice of those who also devised ways to solve the oil problem, the world's financial markets in 1973 and 1974 would no doubt have performed every bit as successfully as the world's oil markets in fact did. Instead, we adhered to traditional principles of sound banking, with the result we see so clearly.

Those who predicted six years ago that the end of the world was at hand, however, are still with us, and standing by their revelation. After all, they have a heavy investment of intellectual capital to protect. Rather than changing their minds, they keep changing the date, validating Winston Churchill's observation: "Man will occasionally stumble over the truth, but most of the time he will pick himself up, and continue on."

To say that the market handled and is handling the financial recycling is not to say that the end of the era of cheap energy is no longer a serious problem to the whole world's economy. It is. To say that the market must remain free is not to say that the central banks of the world should fail to monitor with care the functioning of the market. They should. To say that the commercial banking system of the world performed extremely well in crisis is not to say that the system should not be improved and strengthened. It should. What I am saying is that in attacking our problems in the 1980s we have two models to guide us. We can learn from our experience with what has come to be called the Euromarkets, but is actually one huge international free marketplace. Or we can expand our experience with the kind of regulated markets exemplified by the U.S. Department of Energy and its counterparts around the world.

In my country, the free market and the bureaucracy furnish models of one system that works and one that doesn't. There is no mystery about it. The free market works because thousands of participants vigorously pursue what they believe to be their own self-interest, and thus rational bargains are struck

It appears that Europe is beginning to free up some markets. After more than forty years, exchange controls in the United Kingdom have been abolished, and there are signs in other countries that authorities wish to let the market function. This is a cause of great hope for the future. No one with any experience would predict that the future will be easy, that enormous problems will not be encountered, that many crises will not be faced. Against this, there is a growing awareness that if we free up the immense innovative talent of mankind, we can continue to feed ourselves and raise the world's standards of living and life expectancy, as we have done the last few decades.

There are always those to whom the future seems impossible because they discount the courage and genius of mankind. The Malthusians and their modern counterpart, the Club of Rome, are still waiting for doomsday. But there are others who are working for tomorrow. If we do not turn back from liberal free market principles into the swamp of protectionism, I, for one, have no doubt that we can advance the cause of mankind in the '80s and '90s even more than we have in the '60s and '70s.

The relatively free world of trade and finance we have been building together is eyed by many the way students of engineering eye the tower of Pisa. I would suggest to them that we listen to a bit of American back country wisdom, not elegant in form, but correct in substance: "If it ain't broke, don't fix it."