Wriston, Walter B.
The Decline of the Central Bankers by Walter B. Wriston for The New York Times
For better or worse, the day is long past when a little club of central bankers can affect a currency's value on anything but a momentary basis. If that wasn't clear before, it is now, thanks to the near-collapse last week of Europe's troubled system of economic coordination, marked by the inability of Britain and Italy to defend the value of their currencies.
When foreign-exchange markets were small, a relatively large buy or sell decision of central banks could influence prices, but today the global market is so huge and so integrated that a day's transactions overwhelm any efforts to control prices. Indeed, a brand new international monetary system has been created.
Unlike all prior arrangements, this new international monetary system was not built by politicians, economists, central bankers or finance ministers. No high-level conference was convened to create a master plan. The new system that has defeated central bankers was created by technology -- the byproduct of communication satellites and engineers learning to use the electromagnetic spectrum up to 300 gigahertz.
Today, the value of our currency is determined by the price the market will pay for dollars in exchange for marks or yen or pounds. This is not to say that governments can no longer influence the value of their currencies. But their ability to do so is declining. Increasingly, currency values will be experienced less as a power and privilege of sovereignty than as a form of discipline on the economic policies of imprudent governments.
The new global financial market is not a place on a map; it is more than 200,000 monitors in trading rooms all over the world that are linked together. With this technology no one is really in control. Rather, everyone is in control through a kind of global plebiscite on the monetary and fiscal policies of the governments issuing currency. Information -- from the latest political joke to new gross national product statistics -- moves across the electronic infrastructure. Taking all this information into account, traders value currencies. The natural response to this is that "it was ever thus." But the speed and volume of the new electronic global market is something different in kind and not just in degree. Even though Americans have accepted the ballot box as the arbiter of who holds office, this new global vote on a nation's fiscal and monetary policies is profoundly disturbing to many.
In the past, a finance minister could call a press conference and announce that the current arrangement was no longer satisfactory and that his nation would no longer play by the rules. This is how the gold standard died. Today, the new information standard is far more draconian than any previous arrangement, such as the gold standard or the Bretton Woods system, since there is no way for a nation to opt out.
No matter what formal decisions a government makes, the 200,000 screens in the world's trading rooms will continue to light up, the news will march across the tube, traders will make judgments and a value will be placed on a currency that will be known instantly all over the globe.
The new system punishes bad monetary and fiscal policies almost instantly. One of the most dramatic examples was when President Francois Mitterrand of France came to power in 1981 as an ardent Socialist. The market took one look at his policies and within six months the capital flight forced him to reverse course.
Though central banks have intervened to prop up the dollar, America is no less immune to the market's judgments than France or Britain or Italy Traders at their screens, examining America's policies, will continue to determine what the dollar is worth.