Information, Electronics and Gold
Wriston, Walter B.
In 1943, Wendell Willkie published a book entitled, "One World," arguing for the concept that the fate of each nation is inextricably intertwined with that of every other. Today that thesis, which seemed nothing more than a dream in the midst of the Second World War, has become a truism. The soaring vision of Monnet in designing the Common Market, the birth of the United Nations, the World Bank and the International Monetary Fund all moved us toward one world. But swift as were the politicians, technology has moved still faster and further.
Today, technology has combined with finance in a new and unique way that makes obsolete some of the old ideas of compartmentalized national markets, in much the same way that the advent of the tank in World War I and air power in World War II changed the concept of military power. In advancing this thesis, I am aware of the fact that General Billy Mitchell, who championed the theory of air power, was court-martialed for his trouble. It is also true that when the idea of using a tank in warfare was presented to Lord Kitchener, Secretary of War, he dismissed it as "a pretty mechanical toy;" and concluded, "The War will never be won by such machines." The failure of the establishment, any establishment, be it military, political, financial or even scientific to accept an idea that disturbs the old learning is a recurring theme in history.
Ortega y Gasset opened one of his books with this sentence, "In June 1633, Galileo Galilei, then 70 years of age, was forced to kneel before the Inquisitional Tribunal of Rome and renounce the Copernican Theory, a concept which was to make possible the modern science of physics." So politics were out of phase with science even in the 17th century.
Today a new combination of science and finance produces some unease, because often the consequences of scientific discoveries are not always anticipated. It is a well-established principle that a change of degree--if carried far enough-- may eventually become a difference in kind. In biology this is how new species are created and old ones die out. It can be argued that the speed of electronic information flow when it reaches sufficient velocity changes the nature of the transaction itself. Speed is what transforms a harmless lump of lead into a rifle bullet, or a collection of snapshots into a motion picture. When speed is combined with size in the financial markets, the numbers may rise to a point where they reach a critical size and the market that's created becomes totally new and an integral part of our evolving world order. When this phenomenon is truly understood, the world can adjust, but first we must understand the magnitude and nature of change.
People of all nations have long since adjusted to the grim reality that an inter-continental ballistic missile can travel from the Soviet Union to the United States, or a reverse path, in about thirty minutes, carrying enough explosives to render our society unlivable. We now have a less visible but perhaps equally profound challenge to the unlimited sovereign power of nation-states in the technical reality of global communications. Satellites have made communication costs almost insensitive to distance. There has been steady elimination of economic and technical barriers to the instantaneous exchange of information among peoples. This information is not always welcome and the political implications are enormous, even though barely visible on the horizon today. The luxury that some nations have permitted themselves of tight censorship has become increasingly difficult. Satellites can now pump information from the skies to millions of transistor radios held in the hands of people who live in places which were once thought of as remote areas. It is not only news that is affected, because in the high-speed global transmission of digital data, the computer switching centers of the world make no distinction between the front page of the and the general ledgers of branches of multinational banks. In fact, it is this technology that has made us a community in the literal sense of that word. Whether we are ready or not, mankind now has a completely integrated, international financial and informational marketplace capable of moving money and ideas to any place on this planet in minutes.
But the technological revolution poses thorny political problems. Since the digital information flowing in cables or moving through space will include such things as television shows, telephone conversations, and the stock market averages all mixed together in a single stream, it becomes increasingly impossible to maintain any of the traditional distinctions between transmissions carrying news, entertainment, financial data, or even personal phone calls. This intermixing of data makes it even harder to pass laws restricting the transmission of one kind of information without impinging on the others. Streams of electrons are either free to move across national borders, or they are not.
What we are witnessing and participating in is a true revolution, and like all revolutions it has and is creating political unease. If a nation-state cannot control what its citizens see and hear, a little of the power of the state has slipped away even though a government might still force a modern Galileo to renounce scientific fact or decline a Nobel Prize.
Today, except in a very few instances, national borders are no longer defensible against the invasion of knowledge, ideas, or financial data. The Eurocurrency markets are a perfect example. No one designed them, no one authorized them, and no one controlled them. They were fathered by controls, raised by technology and today they are refugees, if you will, from national attempts to allocate credit and capital for reasons which have little or nothing to do with finance and economics.
The growth of these markets is also a perfect example of unpredictable secondary consequences flowing from primary actions. The United States of America, by prohibiting the payment of interest on demand deposits, forced dollars to seek returns in other areas, and they found these returns in Italy for the financing of international trade. From that modest beginning and without a positive policy decision on the part of any governmental authority, a Eurocurrency market estimated in gross terms at over $800 billion transcends national borders to finance the world's work. The market's strength, resiliency and depth has confounded its critics and surprised even its supporters.
At the time of the OPEC embargo that market transferred the greatest sum of financial assets in the shortest time-frame in the history of the world with only minor casualties. It was an absolutely stunning performance. And all this activity was handled by a market set in motion inadvertently by a government merely trying to influence the movement of credit and capital within its own borders. The Eurocurrency market proved conclusively that, although the world may still be divided politically, it is one economically and financially. Even before the advent of modern communications, governments usually found that attempts to control capital movements failed in the long run. Now it is clear they also fail in the short run.
America's ill-fated experiments with a so-called interest equalization tax provide another example. Designed to assist America's balance of payments, it gave instead great impetus to the Eurobond market and did little or nothing for the U.S. balance of payments. In 1977, Eurobond issues placed in the public and private markets totaled just under $20 billion. Once again, one nation's policies had unintentionally created a new international institutional market of such usefulness that it will not go away. The extent of capital flows depends only on the number of sophisticated investors.
What it all adds up to is a quantum jump in the efficient channeling of the world's capital flows. There are those who do not find this an altogether desirable development. The argument is heard that the very efficiency of the system undermines or complicates national monetary policy in particular countries.
Behind that argument lies a complaint by some governments that the existence of a free market disciplines them when they engage in over-expansionary policies. The modern stream of electrons also carries bits of digital information increasing the mobility of money, making it more difficult to ignore the one-world nature of financial life. The old discipline of the gold standard has been replaced, in fact, by the discipline of the communications revolution. While the new control is not as harsh as the old automatic adjustment of gold shipments, it is in the end almost as certain. It is the successor to the Bretton Woods arrangement, with its pegged rates, where the marketplace punished overly inflationary countries through the loss of reserves. And even then, countries endeavored to maintain their freedom to inflate by imposing exchange controls. Today's efforts by some governments to apply reserve requirements or other controls are only intended to mute the market's response to wide differences in domestic economic policies. Such moves carry with them grave risks for global financial stability. The very fact that the Eurocurrency market has been free has enabled it to act as a safety valve to the financial tensions and pressures inflicted by varying monetary and fiscal policies and such shock events as the OPEC oil price increases.
In his classic work on the gold exchange standard, Jacob Viner wrote that state intervention in private international markets leads "with a certain degree of inevitability to the injection of a political element into all international transactions." The presence of this political element, he noted, necessarily implies a "marked increase in the potentiality of economic disputes to generate international frictions." Politics and diplomacy will be substituted for more routine methods of settling commercial and economic disputes.
If governments and central banks now intervene more actively to control international credit markets, it cannot be doubted that another fruitful source of political conflict among governments will thereby be opened up -- along with the negative effects of such intervention on the economic efficiency of these markets.
Our current banking network, with its Euromarkets and its automated payments system, is of course not the cause of the world capital flows, but merely a means of transmission. It has become almost a book-entry system for part of the world. In fact, Governor Wallich has called it "the ultimate in intermediation between lenders and borrowers, between savers and investors."
This means of transmission of information and money is a primary cause of the fact that international banking is a system designed by fate to exist in a certain state of economic tension, with all governments, including the most democratic. This tension is an ancient phenomenon dressed in electronic clothing.
Observing the achievements of the bankers of Amsterdam during the 17th century, a French philosopher, Charles de Montesquieu, congratulated them for having made it impossible for the princes of the world secretly to devalue their coinage. "The standard of money can no longer be a secret," he said, because the banker has learned "to draw a comparison between all the money in the world, and to establish its just value."
Montesquieu did not think this activity would increase bankers' popularity with governments. And he warned of still another danger. He noted that, by extending credit, banks had created a new species of wealth, and that throughout history the princes of this world have rarely approved of wealth circulating outside their own control. There are countries, he observed, "where none but the prince ever had, or can have, a treasure; and wherever there is one, it no sooner becomes great than it becomes the treasure of the prince." Today there are few princes left in the world, but only the vocabulary has changed. Governments now talk of "stateless money" instead of treasure, but the thought remains. There are still many countries where private banks are not welcome. Banks are unwelcome in Communist countries today for precisely the reasons Montesquieu suggests: they furnish objective standards of measurement not easily subject to political pressures, and the banking system enables wealth to circulate in response to the true economic needs of the world, and not to political ukase or expediency. It is a system that no absolute monarch of Montesquieu's time, or totalitarian government of our own time, could or would live with. Because once a government accepts that system, it can no longer be absolute.
Today this same phenomenon can be observed as the Euromarket handles billions of dollars, Deutsche marks, and other currencies subject to the jurisdiction neither of the country which issues the currency, nor of the country where the transaction takes place. It does no good to wish that the technology had never been invented, or that it would go away. It has been invented, and it won't go away. Just as the high seas are free to carry the world's commerce -- stateless waters if you will-- so the Euromarkets are stateless markets to clear the world's financial transactions with a speed and efficiency unmatched in history.
Modern technology has welded us into an integrated economic and financial marketplace which governments -- and all of us -- must also learn to live with. The clock cannot be turned back. But we in the financial community should probably be spending more time making the nature of this new phenomenon clearer to the world's opinion-makers.
The beneficent results of low-cost, instantaneous international financial transactions, which we have almost begun to take for granted, are by no means appreciated in every quarter. We see laws designed to control transborder data flows being passed, and many more are just over the horizon. All have laudable purposes -- protecting privacy, for instance -- but there are some who suspect that, whatever the stated objective, proposed regulations of transborder electronic data flows are also coming more and more to look like old-fashioned economic nationalism.
As banks have grown into a global, interconnected financial network to meet the needs of a global marketplace, fears have been articulated that the system may be vulnerable -- that it may be only as strong as its weakest link. This "weakest-link syndrome" proved unfounded in the Herstatt crisis, but it exists -- not only with regard to the payments systems, but it is used to make whatever point is the current topic of concern.
It is pointless to debate whether that perception is wholly true, partially true, or not at all true. Whether or not the system today is as fail-safe as it should be, it is not perceived as such by some people. The motives of these groups range from a philosophical distrust of what might be termed economic free speech in a truly efficient market, to genuine worries about the quality of credits being financed. Others, watching the world-wide inflation eat up the world's substance look for something or somebody beyond their own national fiscal and monetary policy to blame. Whatever the motive, and regardless of whether the disquiet is real or imagined, until that perception is changed, our doors will remain open to eager visitors who volunteer to help protect people's assets when what they really have in mind is controlling the flow of capital.
Since this tension between those who see the benefit of intermediation on an international scale and those that don't will continue, it behooves us in the private sector to make the system as efficient and safe as possible. We should make sure that the payments mechanism functions through good times and bad, that reciprocal currency lines are in place and that there is a well-ordered cooperation with the world's central banks which are themselves a major user of the market.
If those of us who are qualified to deal with improving the market do not respond, others will fill the vacuum. Much of what we must do is make more explicit and more visible practices which already exist. As the perception grows that we live in a world of limited resources and of unlimited demand, the world problem continues to be how to make maximum use of these resources. Helping to solve that problem has always been a banker's basic business -- and with the tools now available, we have an opportunity for doing that job with a proficiency never seen before in history.
In fact, we are already doing it. What we have to defend, is our right to continue to do so.