Wriston, Walter B.
Often when we start to think about a complex issue like the International Financial System, it is useful to go back to basics and review what it is that we are trying to achieve. One of the oldest activities on this earth is the trade or barter of goods and services which one person owns, for the goods or services that someone else produces. The voluntary exchange of goods and services which benefits both parties has become the basis of profit and the creation of wealth. In ancient times, as the known world became larger and more complicated, people searched for and found ways to settle accounts with something of value other than the goods involved. The invention of money in all of its various forms gave a huge impetus to the volume of trade and for the first time made capital portable. Prior to that time a man's wealth was expressed by the amount of land he owned, and you couldn't move the farm. The invention of money made all governments desirous of controlling such a powerful new medium, and as they came to understand the wonders that could be worked by printing money, a whole new era opened up which continues to this day. Soon, what were originally formed as banks of issue, but now generally known as central banks, sprang up all over the world. In the mid-nineteenth century central banks were set up in Austria, Denmark, Russia and Japan to deal with the mess created by their governments through the over issue of paper money. Since paper money has no intrinsic value, only scarcity value, the control of the amount of money issued became crucial to its value. In many cases, these early central banks were formed by private citizens with their own capital. In our own country, up until August 1, 1935, when our Government took over monopoly powers, individual private commercial banks all over the nation issued their own dollar currency. Notes of private banks continued to circulate for some years after that.
The reason for this very brief review of a long complex history is to give some sense of how governments developed their exclusive power to issue money, and thus to affect its price in the market. No one has to remind this audience that the value placed on one's currency in the global marketplace in relationship to other currencies, plays an important role in international trade, and to what happens in our domestic economy.
As the American trade deficit has grown, the cross rate on the dollar has become a matter of vital importance to us all. Indeed, what people in other parts of the world are willing to pay for an American dollar has been condemned at various times by various parties as either too high or too low, depending on the political circumstances existing at the time. To some extent the value of a dollar is in the eye of the beholder. Just as there are few C.E.O.'s in this room who are entirely happy with the P/E ratio of their stock, so there are few, if any, governments that are entirely satisfied with the value the market places on their currency. Whenever our economic interests are damaged, whether by a low stock price for our companies, or by a currency value perceived to be either too high or too low, there is a demand that somebody do something. In the case of the international financial system, these demands range from the nostalgic idea of bringing back the gold standard to creating some new kind of international currency. The volume of the clamor, as is appropriate in a democracy, is in direct ratio to the economic pain being inflicted. It is in the nature of politics to find a villain on which to pin the blame. Bankers are often selected for that role. I have been summoned before Congressional Committees to explain why the big banks drove down the value of the dollar in what was described as an unpatriotic way, and have lived long enough to be summoned by another Congress to explain why the banks keep the dollar so high that American manufacturers cannot compete aboard. Whether or not there is or is not a villain, what is not in dispute is that the value of our currency in international markets has a profound effect on our nation and is worth thinking about in an unemotional way.
While the libraries of the world are full of books expounding one theory or another about currency values, relatively few people have studied in a systematic way what happens in the real world as the result of political and economic actions.
The Nobel laureate George Stigler, who has done the most work on cause and effect of economic policy, recently put it this way: "The first and the purest demand of society is for scientific knowledge: knowledge of how the economic system works. Knowledge of the consequences of economic actions... Whether one is a conservative or a radical, a protectionist or a free trader, a cosmopolitan or a nationalist, a churchman or a heathen, it is useful to know the causes and consequences of economic phenomena...Such scientific information is value-free in the strictest sense: no matter what one seeks, he-will achieve it more efficiently the better his knowledge of the relationship between action and consequence."
The transmission belt between national economic policy and the results of that policy on currency values is the new international financial system that is functioning today. We are hampered in our efforts to understand how the new system works, by being burdened with a vocabulary that was not designed to describe the modern world. The words we use do not really tell us what is happening, and so confusion abounds. It is not unlike trying to explain modern computer systems by using terms invented for describing how a steam engine works. In the case of computers, a whole new language was invented to describe both the hardware and software, but unfortunately, no such vocabulary has been developed to help us understand the new international financial system. We talk, for example, of capital inflows or outflows, just as if money really entered our country in a manner similar to the way goods are unloaded from a ship. This is not the case with so-called capital inflows--no one brings dollars into America, or takes them out for that matter. There is no capital inflow or outflow in a merchandise trade sense. What happens is quite different--the ownership of dollars which are already here changes hands. If a German wants to own some dollars, he or she must buy them from someone who owns them and is willing to part with them in exchange for German marks. If the owner who sells the dollars resides in America, and the buyer resides in Germany, we count the transaction as a capital inflow even though the total supply of dollars in the United States is unchanged, and, indeed, cannot be changed except by the Federal Reserve. We all learned in the OPEC crisis, that dollars cannot be taken out of the United States--except for small amounts of currency--only the ownership of existing dollars in a bank located in America changes hands. I mention this fact, which is doubtless well known to this audience, because it is absolutely basic if we wish to respond to George Stigler's admonition to "know" how the economic system works. The threat that the Arabs would pull their dollars out of America was always an empty one, and the Arabs were well aware that it was impossible.
One thing which distinguishes the workings of the new international monetary system, and makes it very different from yesterday, is that the ownership of capital denominated in dollars is so huge and turning over at such speed, that it totally overwhelms the money used to pay for world movements of trade. Capital transactions are now probably 40 or 50 times larger than trade flows. Since this is so, the old measures we use of "trade weighted currency values" no longer have the same usefulness they once had. To further complicate matters, the usefulness of trade weighted averages, which show a 25 or 30 percent decline in the dollar's value since early 1985, is reduced by the fact that America conducts about 1/5 of its bilateral trade with Latin American and Asian countries whose currencies are not usually included in this measure.
The really unique thing about our new international financial system, as opposed to prior arrangements, is that it was not built by politicians, economists, central bankers or finance ministers. No high level international conference produced a master plan. It was built by technology. It is doubtful if the men and women who tied the planet together with telecommunications and computers realized that they were putting in place a global financial marketplace which would replace the Bretton Woods agreements and, over time, alter political structures. Although only a few politicians saw the possibilities of instant global communications, the money traders of the world immediately drove their trades over the new global electronic infrastructure, and thus created the new international monetary system that is governed by the Information Standard.
Today, information about all countries' fiscal and monetary policies is instantly transmitted to more than one hundred thousand screens in hundreds of trading rooms in dozens of countries. As the screens light up with the latest statement of the President or the Chairman of the Fed, traders make a judgment about the effect of the new policies on the relative values of the country's currency and buy or sell it, accordingly. The entire globe is now tied together electronically and there is no longer any place on this planet to hide. Finance ministers who believe in sound monetary and fiscal policies are beginning to perceive that the new technology is on their side, but politicians who wish to evade responsibility for the results of their imprudent actions on fiscal and monetary matters, correctly perceive that the new Information Standard will punish them.
Like all technological advances, the new Information Standard makes the power structures of the world very nervous, and with good reason. The rapid dissemination of information has always changed societies and thus the way governments have to operate. In our own country we have seen many examples in our lifetime, but perhaps the most dramatic was the civil rights movement. The plight of black people in many sections of our nation went almost unnoticed by many Americans for almost 100 years. Suddenly the TV cameras brought into our living rooms the image of Bull Connor with his dogs and whips. Americans decided together in very short order that this was wrong, and the civil rights movement made a quantum leap forward and dramatically changed the political landscape in our country. A similar thing is happening in the financial markets of the world.
Even though politicians in this country have come to accept universal suffrage and the ballot box as arbiter of who holds office and who does not, this new global vote on a nation's fiscal and monetary policies is profoundly disturbing to many. Accepting the judgment of thousands of traders who translate politicians' actions into new values for currencies, is harder to accept because it developed so fast and is new and unfamiliar. Nevertheless, it is about as useful to cuss out the thermometer for recording a heat wave, as it is to rail against the values the global market puts on a nation's currency.
In the 17th century, the Amsterdam bankers made themselves unpopular by weighing coins and announcing their true metallic values as opposed to what some sovereign said they were worth. Those Amsterdam bankers spoke to a very small audience and their voices were not heard very far beyond the city limits. Today technology carries the judgments of the market about currencies to all parts of this planet in minutes.
This state of affairs does not sit well with many governments, because they perceive correctly that the new Information Standard is an attack on their sovereign powers. Since global financial markets are a kind of free speech, many complain about what the markets are saying about a country's policies.
In times past, if a country did not like the way some particular financial standard was working, be it the gold standard or the Bretton Woods agreements, the leader of the country could call a press conference and simply opt out of the system. This has happened many times in history. What will get politicians' attention over time, is that today there is simply no way for a nation to resign from the Information Standard. No matter what actions are taken by a country to try to escape from the system, those thousands of screens in the trading rooms of the world will continue to light up and the market will continue to make judgments.
Since the technology on which the new financial system is based will not go away, it is reasonable to assume it will be with us for a long time. The good news is that since the Information Standard is here to stay, there will be increasing pressure on all governments to put in place sound fiscal and monetary policies, and that means, also, that over time the chances of international financial cooperation are enhanced. While each nation will continue to pursue what it perceives to be its national interest, there will be increasing pressure to harmonize various countries' policies and regulatory attitudes. Progress is already visible in these areas.
There are days when we all yearn for simpler times when the dollar standard obtained and so-called fixed exchange rates tied to the dollar prevailed. We like to think that life was easier before gunpowder, or dynamite or nuclear energy or satellites. It may have been simpler, but governments driven by the pressure of their constituents have always found it hard to refrain from printing too much money or spending more than was collected in taxes. The difference today is that these policies are known and judged almost instantly by a global marketplace. The market is so huge and the turnover so great that something new has taken form. The President of the New York Fed estimates that on an average day in New York about one trillion dollars changes hands. This does not include the stock market or transactions in Chicago or London or other parts of the global market. This sum dwarfs the resources of the central banks of the world and makes their close cooperation imperative. There is no precedent in history for such a state of affairs. It simply did not exist.
The new Information Standard creates problems for us all. There are dangers as well as benefits, and the dimensions of both are still being developed. But whether the new international financial system turns out to be a plus or minus for the world, it is here to stay, and we have to learn to live with it.