The Twilight of Sovereignty and the Information Standard
Wriston, Walter B.
The Twilight of Sovereignty and the Information Standard by Walter B. Wriston for The American Enterprise
Walter B. Wriston, author of the best-selling , is the former chairman of Citicorp. He serves on numerous corporate and philanthropic boards. This article is reprinted by arrangement with Charles Scribner's Sons, a division of Macmillan, Inc., from by Walter B. Wriston. Copyright 1992 by Walter B. Wriston.
UNTIL RECENTLY, WHAT WE CALL money, whether a piece of paper, bookkeeping entry, or physical object, was linked to a physical commodity. The nature of that commodity varied with the people using it: tobacco for the early American colonists; cowrie shells, or wampum, for the American Indians; and of course the more familiar copper, silver, and gold in the form of coins circulated in many other parts of the world.
The link between commodities and money became attenuated over a long period of time. On March 6,1933, a decisive event occurred that put the world on the road to fiat money. President Franklin D. Roosevelt issued a proclamation prohibiting American citizens from holding gold. The link was further severed on June 5,1933, when, by a joint resolution of Congress, the gold clause was repudiated in all private and government contracts. The final blow was administered on August 15, 1971, when President Richard Nixon terminated the convertibility of dollars into gold and the era of floating exchange rates began. Two years later, the International Monetary Fund (IMF) recognized reality and endorsed floating exchange rates. The world since that time has been operating with a monetary system for which there is no historical precedent, in that no major currency in the world is tied to a physical commodity.
The old discipline of physical commodities has now been replaced by a new discipline that information provides. The value of our currency is determined by the price the market will pay for an American dollar in exchange for yen, marks, or pounds, computed at the speed of light by hundreds of thousands of trading room terminals scattered all over the globe. With the new technology, no one, not even sovereign governments, is in control. Rather, everyone is in control through collective valuations.
Unlike all prior arrangements, this new system was not built by politicians, economists, central bankers, or finance ministers. No high-level international conference produced a master plan. The new system was built by technology, the accidental by-product of communications satellites and engineers learning how to use electromagnetic spectrum up to 300 gigahertz. Just as 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 they were building the infrastructure of a global marketplace.
The convergence of computers and telecommunications has created a new international monetary system and ever a monetary standard by which the value of currencies is determined not by the arcane manipulations of central banks, whose total reserves are now dwarfed by a single day's trading on the world's currency markets, but by information-- by a myriad of facts that are now instantaneously available. Ten minutes after the news of the disaster at Chernobyl was received, for example, market data showed that stocks of agricultural companies began to move up in all world markets. For the first time in history, the desire of countless investors, merchants, and ordinary citizens to hold more or less of a given currency will be inescapably translated into a rise or fall in its exchange value, and no government can effectively intervene.
Cherished political, regulatory, and economic levers routinely used by sovereigns in the past thus lose some of their power because this new Information Standard is not subject to effective political tinkering. It used to be that political and economic follies played to a local audience and their results could be in part contained. This is no longer true; the global market makes and publishes judgments about each currency in the world every minute and every hour of the day. The forces are so powerful that government intervention can only result in expensive failure over time.
It was not always so. After World War II, the foreign exchange market in New York was conducted by a handful of traders in the big banks, a few exchange brokers, and a rudimentary telephone system. The telex was the principal means of communication overseas, where trading rooms were beginning to reopen. The volume in the currency market in the late 1940s and 1950s in New York probably did not exceed $750 million a day.
The volume of trading was small partly because complex foreign exchange controls existed in most countries in the aftermath of the war. It is the nature of government never to give up controls once established, so the controls were relaxed very slowly in most cases. One finance minister in Europe understood the stultifying nature of controls and started the train of events that has led to the present free market. Acting on a Sunday afternoon in 1948, Ludwig Erhard of Germany abolished price controls and set the German mark free. He acted on a Sunday because the occupation offices of the United States, the United Kingdom, and France were closed and so were unable to countermand the order. This action was the first of a long chain of events to abolish foreign exchange controls that made the present huge market possible.
Under the old Bretton Woods system, a relatively small club of bankers and politicians believed it could significantly control the value of a given currency by fixing exchange rates. This illusion can no longer be sustained. Today, with almost $2 trillion changing hands every day in New York alone, there is not enough money in the reserves of the world's central banks to significantly influence exchange rates on more than a momentary basis.