The Twilight of Sovereignty and the Information Standard
Wriston, Walter B.
No Turning Back
This new technology has made us a global community. Whether we are ready or not, mankind now has a completely integrated international financial and information marketplace capable of moving money and ideas to any place on this planet in minutes. Capital will go where it is wanted and well-treated; it will flee from manipulative or onerous regulations of its value or use, and no government power can restrain it for long.
The Eurocurrency markets are a perfect example of the Information Standard in action. No one designed them, no one authorized them, and no one controls them. Their very existence, in fact, is a symbol of the growing futility of government attempts to regulate capital. They were fathered by interest-rate controls, raised by technology, and today are refugees from national attempts to allocate credit and capital for reasons that have little to do with finance and economics. Though they got their start some years before the global telecom network became the essential medium of a global financial market, their power, size, and independence were greatly augmented by that network. The Euromarket is a child of regulators who put ceilings on the interest that banks could offer consumers, so consumers looked abroad for places to earn acceptable returns. Interest rates on the other side of the Atlantic were generally much freer, so money, including dollars and Iron Curtain capital, moved to Europe. In the mid-1950s, the Cold War made communist governments nervous about depositing their dollar reserves directly in banks in the United States for fear their funds would be seized, so they deposited their dollars in Britain and then, searching for a higher yield, in Italy.
The Euromarket got a major boost in 1957 when the British government imposed controls on sterling credit in an effort to support the pound but imposed no such restrictions on dollar or European currency transactions. Again in 1963, the United States began a futile bout with capital controls, triggering a further exodus of American capital. In this period, New York banks began to finance projects in America with dollars deposited in European banks.
From these small increments has grown a market that is truly something new under the sun. The Eurocurrency markets move capital to where it is needed and can appreciate faster and more efficiently than ever before.
The very efficiency of the system undermines and complicates national monetary policy everywhere. The existence of a truly free market reins in irresponsible policymakers. The old discipline of the gold standard has been replaced by the new discipline of the Information Standard, more swift and more draconian than the old. This continuing direct plebiscite on the value of currencies and commodities proceeds by methods that are growing more sophisticated every day. 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.
This new global vote on our fiscal and monetary policies may be profoundly disturbing to many individuals unaccustomed to the speed and interdependence of the new system. In the past, nations that did not like the gold standard, gold exchange standard, Bretton Woods system, or whatever dominated the international financial system of the day, could simply opt out. Today, there is no way for any nation to opt out of the Information Standard. Even Japan, lauded for the skill of its policymakers in controlling markets in difficult times, is subject to the Information Standard.
The new system is also steadily driving sovereign nations toward unprecedented international cooperation, particularly in the economic arena. The European Economic Community (EEC) is a case in point. Today, we have a kind of mini-Bretton Woods agreement called the European Monetary System, or EMS. It is not a fixed-rate system, as currencies are realigned each year, but it is anchored by the German deutsche mark, just as the Bretton Woods system was based on the dollar. The system forces all participating governments to weigh heavily the actions of their neighbors in forming their own policies, providing an intriguing glimpse of the emerging global market.
The ability to move capital to where it is needed and wanted is fundamental to the continuous effort of mankind to live a better life. Our challenge is to keep the data moving with speed and efficiency while balancing the competing interests of individual nations. Doing this well will be the greatest contribution we can make to the world that emerges from the information explosion.
As the relative weight of the world economy outside any given sovereign state increases, the need for international cooperation also increases. In June 1989, Federal Reserve Chairman Alan Greenspan called on other central bankers to cooperate in overseeing international markets. He urged central bankers to work together to supervise multinational payment and clearing systems rather than create a centralized authority. The growing practice of "netting" debits and credits in each country is leading, Greenspan said, to the "decentralization of the major monetary mechanisms" and could diminish the supervisory power of central banks. No leader likes to face the erosion of his own power, and central bankers are no different. The world has changed, however, and central bankers, acting alone in their own country, no longer can control financial events in the way they once could. The huge capital movements that wash across the world, the international arbitrage of interest rates, the global futures market, and above all, the communications ability that permits individuals to move their money away from danger and toward a haven robs individual central banks of much of their power. Greenspan is among the first to highlight the erosion of sovereign power. Indeed, the process has just begun.