Remarks at the Customer Lunch

Wriston, Walter B.

2007

The air these days is filled with ideas, both old and new, about our global market and how to improve it, or repair it, or change it. Unfortunately much of the thinking is taking place within a framework that no longer exists. Thomas L. Hughes, back in 1971, put it this way: "...half-seriously, one can say that the 20th Century is currently made up of 14th Century farmers, 15th Century theologians, 16th Century politicians, 17th Century economists, 18th Century bureaucrats, 19th Century generals, and 21st Century scientists." There is more than a grain of truth in that statement.

The iron laws of the gold standard, and later the gold exchange standard described by Jacob Viner in his book so many years ago, have been replaced by new laws which are just as inflexible, but have attracted considerably less attention. The 21st Century scientists working with the 17th Century economists, and 20th Century politicians have created the one world that the American Wendell Willkie wrote about in the 1940's but never lived to see. These new laws are not made by economists or politicians but flow out of the expansion of the electromagnetic spectrum up to 300 gigahertz. In its simplest terms, this scientific advance in the art of communications has created trouble for governments on all the world's continents. It is also fair to say it has created an entirely new system of world finance based on the incredibly rapid flow of information around the world. I would argue that what one might call the "information standard" has replaced the gold standard and indeed even the system invented at Bretton Woods.

Not only has the expansion of the electromagnetic spectrum changed the world's financial system, it offers also a profound challenge to the unlimited sovereign power of nation states since it disrupts and intrudes upon much conventional political thinking. The 70 commercial satellites currently circling the earth can and do pump information to hand-held transistor radios, making old-style national censorship an exercise in futility. The computer switching centers of the world make no distinction between digital information streams carrying the front pages of your newspaper or the general ledger of Citibank. Most, if not all, governments are nervous about the free flow of news and data across their borders. Money often moves in response to information, and unfortunately, there are very few governments indeed that do not attempt in one way or another to control the movement of wealth across their borders. At one time, not so long ago, a person's wealth was counted by the amount of land that he or she owned and no matter how bad an economic policy a country pursued, the sovereign did not have to worry about the flight of capital. You literally could not move the farm. When the invention of money made capital mobile, exchange controls were not far behind. Today, when information about money moves with the speed of light, a tricky new situation is created. Capital flows now pose economic and political problems significantly larger than in the past, since history records that the tightest controls all fail in the end.

This situation about the futility of controls is not new. It was explained to Samuel Pepys in 1664. On January 27-29, Pepys recorded a conversation with a Mr. Slingsby about the mint and coinage of money.

"...he made me fully understand that the old law of prohibiting bullion to be exported, is, and ever was a folly and an injury, rather than good. Arguing thus, that if the exportations exceed importations, then the balance must be brought home in money, which, when our merchants know cannot be carried out again, they will forbear to bring home in money, but let it lie abroad for trade, or keepe in foreign banks: or if our importations exceed our exportations, then, to keepe credit, the merchants will and must find ways of carrying out money by stealth, which is a most easy thing to do, and is every where done; and therefore the law against it signifies nothing in the world. Besides, that it is seen, that where money is free, there is great plenty; where it is restrained, as here, there is a great want, as in Spayne."

Samuel Pepys described Mr. Slingsby as "a very ingenious person," and I have to agree. Nothing much has changed except the method of moving money. Governments still attempt capital controls, often in an attempt to hold an exchange rate for its currency that the rest of the world regards as unrealistic. The difference is that such efforts now fail sooner rather than later.

I do not know of a government that is entirely happy with the cross rate of its own currency. I have even heard whispers that some on this island believe the value of the U.S. dollar may not be in perfect harmony with reality. There are people back home who feel the same about the Japanese yen. This is not a new situation. When the Roman emperors wanted to inflate their currencies to pay for their legions -- a situation that is not unknown today -- they put less and less silver in the coins and more and more copper. The ruler's picture continued to be put on the coins for centuries; but the scales in the Amsterdam money markets ignored the noble pictures, and Dutch bankers published the true weight of the silver in each coin. Montesquieu put it bluntly: "...A prince," he says, "might deceive himself, but he could deceive nobody else."

It is an irony of history that at the time silver has disappeared almost entirely from coins in many countries, technology has made it impossible to hide national economic policy from the world. What used to be known as "debasing the coinage" and getting away with it, at least for a limited period, is now no longer possible. The words of a prime minister or a president appear on the screens of the trading rooms all over the world in minutes, and are reflected in the currency cross-rate immediately. This almost immediate result is far faster than the old balance scales in 16th Century Amsterdam. It will not surprise you to know that the Amsterdam bankers were not very popular with governments when they suggested that the value placed on some nations' money was not as great as what the issuing government would like the world to believe. What has come to be known as electronic trans-border data flow is equally unpopular for some of the same reasons.

A great deal of human ingenuity has been expended on moving both ourselves and our information faster and faster.

When I joined the international division of Citibank in the late 1950's, instructions were clearly set forth that you never sent a cable if a letter would do. And the letter often went by sea mail. We took our first halting step toward the electronic age when we set up a 75 baud telex line between the Citibank offices in N.Y. and London. This so-called half-speed channel stuttered out about 7 characters a second. Today we have the capacity to transmit data at the rate of 152,300 characters per second. This is not just a change of form, it is a change of substance.

To the international traveler, the Concorde is the fastest available means of travel. You can now race the sun and fly from Europe to America and arrive before you left. Data, on the other hand, can and does move even faster. Although technology is advancing at a rapid rate, we sometimes forget how fast huge capital investments can become obsolete. In my country, the legendary pony express that carried the mail between St. Joseph, Missouri, and Northern California in 8 days was the cause of song and story. By setting up relay stations every 25 miles, these horses and riders covered the 1,950 miles through often hostile country in record time. This daring innovation captured the imagination of the world, but the service lasted less than 12 months -- the completion of a single telegraph wire put the pony express out of business.

This galloping technology, so to speak, was not solely an American phenomenon. Europe too had its businessmen anxious to be the first to learn the news. In 1849, lines existed between Berlin and Aachen and between Paris and Brussels -- leaving a gap of 100 miles between Aachen and Brussels. At that time, the train took 9 hours to cover the distance between these two points. Carrier pigeons took 2 hours. Working with these facts, some entrepreneurs sent Paris Bourse closing prices via telegraph to Brussels, where a Reuters agent put them on a carrier pigeon which flew to Aachen, and from there the quotations were relayed via telegraph to Berlin. This complex system bettered the competition by seven hours. The last pigeon to fly this route, a bird named Gretchen, was grounded in 1851 when the telegraph line was completed.

The coming of the telegraph wire was not greeted with enthusiasm by the investors in the pony express, nor was the early advent of swift data flow embraced by some government owned telegraph systems when the telephone was invented.

In 1879, Sir William Preece, the chief engineer of the British Post Office testified in the House of Commons that the telephone had little future in Britain. "There are conditions in America which necessitate the use of such instruments more than here. Here we have a superabundance of messengers...the absence of servants has compelled Americans to adopt communications systems."

Some advances of science we not only accept, but embrace. When I was a boy, the terror of our parents was polio and mastoid. The advent of antibiotics eradicated mastoid operations, and the Salk vaccine all but wiped out polio. But not all progress is beneficent. The invention and deployment of intercontinental missiles meant that the two broad oceans which so long protected America would no longer have that capacity.

As world policy adjusts to these realities, so must we adjust and rethink how the world's financial system will function in the age of almost instant information. There is no longer anywhere in the world to hide. Even those countries which are self-sufficient in food, in energy, and natural resources can no longer isolate themselves from the rest of the world. This state of affairs does not necessarily make the world an easier place in which to live. There are many days when buyers and sellers, politicians and bankers, all long for the past world of fixed exchange rates, and for what seems in retrospect like simpler times. We are tempted to dream of the return to more compartmentalization of national security, when the castle wall constituted a real obstacle to the invader. But the progression of innovation is irreversible. Each new invention brings changed circumstances with which the world must cope. Edward the Third forever changed warfare at the battle of Crecy by introducing the Welsh long bow against the French. In more modern times, the tank and the airplane changed forever the conduct of warfare.

Today the financial long bow, as it were, is the linking of the satellite, the computer, and the cathode ray tube. These systems produce new and innovative ways to give us a worldwide market in money and information. The kind of a world that existed in July, 1944, when the United Nations Monetary and Financial Conference gathered at Bretton Woods, New Hampshire, has changed so much as to be almost unrecognizable. The nature and distribution of economic and military power has shifted dramatically, and this combined with the new technology, has destroyed many of the old arrangements. We all have our own investments of intellectual capital in things as they were yesterday and sometimes even a compulsion to preserve them in the face of all evidence to the contrary. To recognize in a clear-eyed way the existence of an international information standard is not in any sense to denigrate the achievements of the old fixed exchange rates of Bretton Woods, any more than taking the Concorde to New York denigrates the achievements of the clipper ships. It is simply a different world. There is a time and place for everything. Thomas Hobbes once said that: "Hell is truth seen too late."

The truth is that there is a new phenomenon in the world and one with which we have to deal. There exists a global marketplace for ideas, money, goods and service that knows no national boundaries. The beggar-thy-neighbor polices originally developed by Louis the 14th's finance minister, Jean Baptiste Colbert, and still pursued by some governments -- often urged on by their merchants and industrialists -- can no longer work. We are all in the same boat and the communications revolution makes it impossible to ignore this fact even if we wished to. We now have a new calculus which, I believe, will in the end be beneficial to the world. It exerts global pressure on all governments to pursue sounder economic policies because it is becoming increasingly obvious that it is now impossible to hide in our new electronic world.

There are some who find this disconcerting, and no doubt it has unwanted side effects. Unfounded rumor travels the same wave length as truth. As U.S. Justice Oliver Wendell Holmes once pointed out: "Free speech would not protect a man in falsely shouting fire in a theater and causing a panic." The truth is that today we all live in a global village and a little more care has to be exercised in shouting fire than even in Justice Holmes' era.

Markets can and do overreact until fact can be sorted from fiction, often at great cost. Maybe life was easier in the age of homing pigeons, but the hard truth is that the genie will not go back into the bottle and the scientific advances are irreversible. Modern gold--or the liquid capital of our citizens--will flow in or out of our countries in response to information, as did gold itself in other times. It is up to us all to learn how better to manage our affairs so that we may benefit from the new technology; not to be hurt by it.

The discipline of the information standard is a harsh new reality, but it is no more difficult to cope with than other quantum leaps that have changed our world over the last decades. Almost five centuries ago, Machiavelli observed that: "It must be remembered that there is nothing more difficult to plan, more uncertain of success, nor more dangerous to manage than a new order of things. For the initiator has the enmity of all who would profit by the preservation of the old institution, and merely lukewarm defenders in those who would gain by the new ones."

In this case, the scientific technology is thrust upon a banker's world, and we have no choice but to manage this new order of things. I have no doubt, but that we shall do so.

 
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  • This document was created from the speech, "Remarks at the Customer Lunch," written by Walter B. Wriston for the Customer Lunch on 13 June 1984. The original speech is located in MS134.001.005.00025.
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