Wriston, Walter B.
In Search of a Money Standard: We Have One: It Comes in a Tube
Whenever some major event turns the spotlight on the international financial system, there is never a shortage of people to step forward with a grand design to solve the problem of the moment. On Sept. 22, the Group of Five announced plans to damp the waves of floating exchange rates through coordinated Central Bank intervention. This week Rep. Jack Kemp and Sen. Bill Bradley have convened a meeting billed as a "congressional summit on exchange rates and the dollar." All of this is designed to explore and then deal with the breakdown of the Bretton Woods system of fixed exchange rates.
The quantum jump in the price of oil in the early 1970s created a massive transfer of financial resources from user countries to producer nations. As the magnitude of financial flows became apparent, a spate of articles forecasting an imminent breakdown of the system graced the pages of our newspapers and magazines. Innumerable ideas were advanced about how to handle this perceived problem. Learned articles were written about the necessity of creating mega-mutual funds to handle the new-found wealth of OPEC.
As the huge transfers continued, inevitably some people began talking about tinkering with the international monetary system to prevent its breakdown. Those with the least faith in markets urged more government regulation. Some wished to return to what they thought were simpler times, and talk about the gold standard began to creep into conversations. The air often became heavy with nostalgia about the wonders that this system supposedly produced. The pressure of the current trade deficit has sparked renewed calls to construct a new international monetary system that will be congruent with one theory or another. The irony is that these entreaties come too late: We already have a new system in place.
The new system was not built by politicians or economists. It was built by technology. In some respects the new world financial system is the accidental byproduct of communication satellites and of engineers learning how to use the electromagnet spectrum up to 300 gigahertz. In the same manner that Edison failed to foresee that his phonograph would have any commercial value, the men and women who tied the world together with telecommunications did not fully realize that they were building the infrastructure of a global marketplace.
The convergence of computers with telecommunications has produced a global trading system, which in turn has allowed creation of a new international monetary system I call the Information Standard. Because this global market is something different in kind, and not just a change in degree, it has truly revolutionized the world. Political, regulatory and economic concepts and compacts suddenly lose some of their relevance, and everyone from business people to politicians has new issues to worry about. The new Information Standard, unlike all prior arrangements, is not subject to effective political tinkering.
Kings and other national leaders throughout history have always been nervous about people learning too much too quickly about the way a political process debases their people's savings. The Amsterdam bankers in the 17th century made themselves unpopular with their contemporary governments by weighing coins and publishing their true metallic value, which was often much less than what was represented on the face of the coins. That same principle has now been expanded by technology. The global market makes and publishes judgments about each currency in the world every minute and hour of each day. It used to be that political and economic follies played to a local audience, and their results could be contained. This is no longer true. This state of affairs does not sit too well with many sovereign governments because they correctly perceive the new Information Standard as an attack on the very nature of sovereign power.
Instead of weighing metal coins and publishing their intrinsic worth, the global market weighs the fiscal and monetary policies of each government that issues currency and places a value on the currency that is instantly seen by traders in Hong Kong, London, Zurich and New York. Even major countries that announce inadequate monetary or fiscal policies have seen their foreign-exchange reserves vanish in days. There is no longer enough money in the central banks of the world to hold an unrealistic exchange rate in the face of bad economic policies. Minutes after any official announcement, financial-data screens light up in the world's trading rooms. Scores of traders make their judgments about the effects of the new policies on a currency's value and then they buy or sell. The entire process does not take much more time than it took the Dutch bankers to adjust their scales in Amsterdam.
Since free markets are a kind of free speech, many complain about what is said. The dollar, I read, is overvalued or some other currency is said to be undervalued. The problem with these judgments is that in today's world it is very easy to learn that a currency is worth only what someone will pay for it. The seller often thinks the price too low and the buyer complains it is too high, but the printouts confirming the billions of dollars of trades record the value of any currency in the market. The $300 billion of capital changing hands in the Euromarket every day has completely overwhelmed trade volumes.
Prior to the advent of the Information Standard, if a country did not like the gold standard or the gold exchange standard or the Bretton Woods arrangement, it could opt out of the system. A finance minister would call a press conference and explain that the current international arrangements were unsatisfactory and that his nation would no longer play. This was the fate of the gold exchange standard and the Bretton Woods fixed exchange standard. Today, there is no way for a nation to opt out of the Information Standard. There is no place on this planet to hide.
This massive reordering of the international financial system has been largely overlooked because the scientists who created the technology did not focus on their creation of the global marketplace, and the central bankers and governments weren't trained to anticipate the impact of technology on currency values. But ready or not, the technology won't go away, the market won't stop making judgments every minute, and the Information Standard is here. Like other forms of free speech, governments will have to learn to live with it.