Remarks Before the Paris Chamber of Commerce
Wriston, Walter B.
Back in 1889 when Charles Eiffel began raising his tower for the Centennial Exposition, the structure aroused feelings of amazement, skepticism, and plenty of opposition on the grounds of taste. While it is difficult to imagine now, the protests lasted many years.
How safe could it be, this open-lattice wrought iron structure, built in a matter of months at little cost with a small work force? In a city where the beauty of the skyline is said to be that there is no skyline, how could they ruin the effect with a structure twice the height of the Great Pyramid of Giza?
Both for reasons of safety and aesthetics many Parisians were seized with an impulse to dismantle the Tower. Only after many years was Eiffel's vision vindicated; and the Tower came to symbolize Paris to the world.
Today it would appear that there are some people who are seized by a similar impulse when they contemplate the smoothly functioning, admirably efficient--but unregulated--international Euromarkets. From their own special perspective, they see a free market teetering perilously, threatening to collapse at any moment, unless they can somehow manage to control it.
In recent weeks, their cries of alarm have been somewhat less vociferous, or at least less public.
But the relative stillness should not fool us into thinking that there will be no further attempts to control what Peter Drucker has called "a financial instrument that may have saved the world economy, and indeed the free-market system."
It is a paradox that this relative freedom in international markets exists only because of various governments' efforts to restrict such freedom. The remarkably efficient Euromarkets were produced by the actions of sovereign nations--the United States prominent but by no means alone among them--to govern and restrict the flow of capital across borders.
Britain put controls on sterling, effectively withdrawing it from international markets. The U.S. put ceilings on interest rates, effectively driving dollars into international markets. A free international market quickly developed and grew into one of the most remarkable phenomena of the postwar world. Just as free speech is feared by many governments, so also are free financial markets because prices and costs are a kind of economic free speech which might embarrass governments. Today's free markets, like the Amsterdam bankers of the seventeenth century, put a price on national currencies that reflect buyers' judgments of national fiscal and monetary policies. This is not always well received. Many years ago, Charles de Montesquieu congratulated those bankers for making it impossible for princes to secretly devalue their coinage. He observed that the function of judging the value of money would not enhance a banker's popularity with governments. Montesquieu turned out to be right on all counts--today only the vocabulary has changed. Governments now talk of "stateless money" as a term of opprobrium, and "working parties" have replaced Princes to devise ways to control the market. Congress has investigated American banks to explain the weakness of the dollar from time to time, and other governments watching inflation consume the world's capital look to others to blame. But the free Euromarket, like the free press, does not create news, it only reports it.
The road to freedom is never easy and once lost is hard to regain. The benefits of free markets in ideas, politics and money are plain for all to see. The rebirth of Europe after World War II is a clear and dramatic illustration of this effect. Europe after the war dismantled controls and restrictions it had had before. International trade barriers fell, exchange was relatively unrestricted, the climate for investment became more free and hospitable This relative freedom became the lever that enabled Europe's rebuilding to proceed at an astonishing pace. Output per person increased three times as rapidly as it had before the war. World trade increased 500 percent in 25 years. None of this was achieved without pain and effort--and much of it over the objections and warnings of those who thought only centralized planning could solve our problems.
It is the same whenever free and open trade replaces the restrictions of selfish, protective economic systems. The efficiency of it all confounds the regulators, while the consumer enjoys the benefits.
Jean Monnet, architect of the European Coal and Steel Community recalled the founding of the community in his memoirs, "In retrospect, it is hard to realize the effect of such a change, because the new situation now seems so normal that one can hardly imagine the absurd system it replaced.
I remember vividly the debate in Europe when it was planned to dismantle the European Payments Union--a complex government clearing system for inter-European trade. The fact that a handful of foreign exchange traders could handle the greatest two-way trade in the world--at that time between Canada and the United States--astounded the experts. But the EPU was dismantled, and the market did work. In fact very few people even remember the EPU today.
In this era, Eurodollars have accomplished miracles that the most conscientious central planners have never dared imagine, much less approach. The most dramatic demonstration of how a free international financial market can rescue the world economy--in spite of the most vigorous efforts to prevent it--occurred in 1974. At the time, you will recall, many of the world's experts, with the notable exception of Citibank, were confidently predicting that it was hopeless to expect to recycle the tremendous surpluses generated by the Organization of Petroleum Exporting Countries, because there was no formal, regulated machinery in place to handle such a task. As it turned out, the market recycled these surpluses with very minor casualties precisely because there was no formal, regulated machinery to handle this task.
The recycling of $60 billion of OPEC surpluses was the greatest transfer of financial assets in the shortest time frame in the history of the world. One might think that this stellar performance would win the plaudits of the crowd, that the experts would be delighted with a herculean task well done. No such thing happened.
The spectacle of this market working so impressively, instead of inspiring universal confidence, seemed only to fan the indignation of all those who still think that the Eiffel Tower spoils the Paris skyline. Their desire to control the international financial markets as they control so many national financial markets, is, however, a vain wish.
The market remains free, offering the efficient, flexible, and prompt delivery of funds where they are needed on a world-wide basis.
For the first time in world history, the LDCs have a way out of the vicious circle of poverty and the lack of development capital. The Eurocurrency and Eurobond markets are today providing $30 billion a year with no political strings to credit worthy LDCs. This has enabled some of them to achieve the unthinkable, a doubling of standards of living in ten to fifteen years.
Should the regulatory fever suddenly seize the governments of the Group of Ten nations, the result would be the same as it has been in earlier cases. Some new free market would promptly spring up outside the regulatory reach of the ten nations. The same actions would proceed, barley missing a step. Only the venue would have changed.
There are, however, other models we can see around us. In all of our individual countries we see examples of the futility of attempting to make water run uphill. In the U.S., educational examples are frequently provided by our Department of Energy.
A few years ago, Americans were lined up at gasoline stations waiting for gas, because the Energy Department had first ordered the refining of too much heating oil instead of gasoline, then allocated the available gasoline to the wrong places. By June, ski resorts were awash with gasoline, but nobody could find gasoline to drive to the beach. When economic decisions are made in the political arena instead of the free market, trouble always ensues. In my country, with a very low savings rate, which is righteously deplored by every politician, we have a law limiting what banks can pay to savers that is about half our rate of inflation. People, being intelligent, respond by not putting their money in savings accounts which merely eat up their capital.
This is the kind of wisdom and direction that many would like to see brought to the international financial markets. So far, however, world capital markets have managed systematically to adjust and preserve the world's economic balance without waiting for governments to tell them how to do it. In fact, the markets usually are well on the way to solving a problem about the time that regulators become aware of it and start gearing up to tell us how to manage it.
Members of the international banking community are the recipients of much of this gratuitous advice. Had the financial markets followed the advice of those who also devised ways to solve the oil problem, the world's financial markets in 1973 and '74 would no doubt have performed every bit as successfully as the world's oil markets in fact did. Instead, we adhered to traditional principles of sound banking, with the result we see so clearly.
Those who predicted six years ago that the end of the world was at hand, however, are still with us, and standing by their revelation. After all, they have a heavy investment of intellectual capital to protect. Rather than changing their minds, they keep changing the date, validating Winston Churchill's observation that: "Man will occasionally stumble over the truth, but most of the time he will pick himself up, and continue on."
To say that the market handled and is handling the financial recycling is not to say that the end of the era of cheap energy is no longer a serious problem to the whole world's economy. It is. To say that the market must remain free is not-to say that the central banks of the world should fail to monitor with care the functioning of the market. They should. To say that the commercial banking system of the world performed extremely well in crisis is not to say that the system should not be improved and strengthened. It should. What I am saying is that in attacking our problems in the 1980s we have two models to guide us. We can learn from our experience with what has come to be called the Euromarkets, but is actually one huge international free marketplace. Or we can expand our experience with the kind of regulated markets exemplified by the U.S. Department of Energy and its counterparts around the world.
In my country, the free market and the bureaucracy furnish models of one system that works and one that doesn't. There is no mystery about it. The free market works because thousands of participants vigorously pursue what they believe to be their own self-interest, and thus rational bargains are struck between buyers and sellers. The U.S. Department of Energy model doesn't work because it attempts to substitute centralized policy judgment for the distributive wisdom of the marketplace. If all that did were to fail, the damage would be contained. But inmost instances of this kind, the real casualty is individual liberty, the loss of a little bit more of our freedom of choice.
It appears that Europe is beginning to free up some markets. After more than 40 years, exchange controls in the United Kingdom have been abolished, and there are signs in other countries that authorities wish to let the market function. This is a cause of great hope for the future. No one with any experience would predict that the future will be easy, that enormous problems will not be encountered, nor that many crises will not be faced. Against this, there is a growing awareness that if we free up the immense innovative talent of mankind we can continue to feed ourselves and raise the world's standards of living and life expectancy as we have done the last few decades.
There are always those to whom the future seems impossible because they discount the courage and genius of mankind. The Malthusians and their modern counterpart, the Club of Rome, are still waiting for doomsday. But there are others who are working for tomorrow. If we do not turn back from liberal free market principles into the swamp of protectionism, I, for one, have no doubt that we can advance the cause of mankind in the '80s and '90s even more than we have in the '60s and '70s.
The relatively free world of trade and finance we have been building together is eyed by many with the same distrust with which Parisians in the 1890s viewed the Eiffel Tower. I would suggest to them that we listen to a bit of American back-country wisdom, not elegant in form, but correct in substance: "If it ain't broke, don't fix it."