No one has to tell this group that we have just passed through the worst economic conditions since the 1930's. Whenever there is a worldwide recession, loans to individuals and to companies that appeared sound when they were made drift into trouble. To quote an old Wall Street adage, "whenever the tide goes out there are always a few dead cows on the beach."

In my country, for instance, the federal housing authority suddenly finds itself with thousands of home-mortgage defaults by Americans who have lost their jobs. Even today, the U.S. government has about $3.7 billion of past-due student loans. The lender is then often blamed for lending too much on a house or for an education, where two years before he was being condemned as a social skinflint for lending too little. That, as we all know, is a banker's lot: it goes with the uniform. But then as the economy recovers, a rising tide lifts all the boats, and home mortgages and student loans become transformed as if by magic into a premier bank asset. This cycle has repeated itself many times in the past and no doubt will do so again.

As housing has now recovered, attention is focused on loans to less developed countries and what went wrong. There always has to be something going wrong.

To look at what went wrong in some developing countries, we have to start at what went wrong in the rest of the world. First, there was a worldwide recession that left some 30 million people unemployed in the OECD nations; second, there was a quantum jump in the price of oil from $2 a barrel to $30; third, an unprecedented decline of world exports for two years in a row and the lowest commodity prices in years. This global trauma was enough to unseat many governments, substantially alter trade flows, drive many countries into liquidity crises and many companies into bankruptcy.

The technical lending problem that surfaced in many less developed countries was the lack of equity. Too much was financed by debt and too little by equity. In many countries, this state of affairs was as much a political decision as an economic one, brought on by national policies that tended to equate foreign capital with exploitation. Those countries that attracted foreign capital, and let it flow in and out without let or hindrance, have not had problems of the magnitude of those with restrictive capital policies. These policies were not put in place entirely by accident. senator Daniel Patrick Moynihan made the point in a brilliant article in commentary magazine in 1975, almost a decade ago. What he called the "British Doctrine" was carried around the world by the students of the London School of Economics who returned home after their studies and took official positions which influenced policy in the developing world. Indeed, many of these former students became finance ministers. The Fabian Society's ideas taught by the London School of Economics at that time held that profit was synonymous with exploitation, public ownership of the means of production should be substituted for private ownership; that foreign equity capital constituted an invasion of national rights, and that there was plenty of wealth to go around, if only it were fairly distributed.

As one developing country after another picked up and expanded these ideas with local twists and turns, foreign equity was actively discouraged by myriad regulations and in some cases frozen out altogether, without that layer of equity to absorb the massive shock of worldwide recession, projects financed 100% by debt soon got into trouble. With the blinding clarity of hindsight, we bankers, along with many others, made a mistake in not recognizing the seriousness of this structural defect, which would become readily apparent at the advent of a worldwide recession. The developing countries, which followed this policy of freezing out foreign capital, made the mistake of assuming that more debt would always be available in world capital markets. Some western governments encouraged and applauded this "British Doctrine" for others, although not adopting it themselves. Many developed countries, my own included, made a mistake in pursuing stop-go monetary policies that drove up interest rates and helped produce the worldwide recession, which has caused so many social and financial strains.

There is, as we all know, a finite amount of savings in the world and an almost infinite demand for it. This being the case, history shows that capital will go only where it is wanted, and it will stay only where it is well treated. as world recovery takes place, and one country after another puts in place economic policies that bring right their balance of payments, their access to markets will return, but perhaps on a somewhat different basis from before. It is reasonable to expect that access in the future will be somewhat easier for those nations that welcome a layer of equity than for those that do not. Those that do not welcome foreign capital will have a much more difficult time in raising from private sources, both local and foreign, the amount of money they need to keep their economies growing, at any given time there are basically two kinds of money circulating in the world. There is money that has recently passed through the hands of a tax collector and there is money that somehow remained in the hands of individuals after the tax collector got through with them. These two kinds of money behave in very different ways.

The kind of money that has recently passed through the hands of the tax collector can and will be sent wherever, and on such terms as, some government or international agency employee or staff thinks it ought to go.

The other kind of money -- the money that escaped the tax collector's net and remains in the private sector -- will go only where it wants to go. It flows toward the best blend of risk and return. It can be attracted but it cannot be pushed. it is this second kind of money that is entrusted to the world's commercial banks. It is for this reason that comparing the loans and other assets of commercial banks to those of governments or international lending agencies is a textbook example of comparing apples to oranges, and yet this fundamental confusion is at the bottom of much of the debate about the international debt situation.

Much of what we read and hear about the role of commercial banks in international lending seems to raise the question: "What should be the role of private banks?"

That is the wrong question. The real question is: "What can be the role of private banks?" And the answer is that you may be able to pull a wagon with a piece of rope but you cannot push it. Unlike the tax collector, the commercial banker is not equipped with sticks and stones, nor should he be.

As the pool of money made available by the tax collectors of the world has seemed to be less capable of satisfying the needs of the debtor countries, more and more arguments have been advanced that attempt to make private funds behave like public funds. It can't be done.

The second fundamental thing to be considered is that we are not living in the same world we grew up in. Since the first commercial communications satellite went up in 1964, we have been moving closer and closer to a one-world international market. Clearly, the information standard has replaced the gold standard and in its own way is just as severe. The monetary and fiscal actions of governments are instantly communicated all over the world and show up in the market's judgment of currency cross rates. There is no way to hide bad policy from the millions of decision makers that constitute the world market. Some governments have not yet grasped the full implications of the information standard and continue to believe you can fool the world market over time. Technology is against them.

There are now some 70 commercial satellites in space capable of moving money and information around the world at the speed of light and at ever-diminishing costs. For more than a decade, the cost of communicating electronically has gone down more than 20% a year. The cost of storing information has gone down more than 40% a year.

This communication revolution is what really created the eurobond market and the eurocurrency market. Many, if not all, governments dislike these free markets and would like to control them. My own government argued for reserve requirements at our IMC conference in London not long ago. The advent of this information standard has, I would suggest, fundamentally changed the world.

An individual country may place legal or regulatory obstacles to the free flow of electrons just as it may censor its postal services or its media. But the net result will be to disadvantage its own citizens, banks and businessmen in their efforts to compete in the one-world marketplace, placed in this context, it is clear that international banks have not created this one-world financial marketplace; a one-world marketplace has created international banks, a government which places its own banks at a disadvantage will not succeed in changing the pattern. It will only succeed in transferring much of its banking activities to some foreign country.

Behind the speed of electronic transfers and global marketplace, banking fundamentals still apply. in fact, they have never changed. The simple fact is that while lenders can reschedule or stretch out maturities, only the borrower can take the actions necessary to repay debt. If a corporation cannot earn money by selling a product in sufficient quantities at a price the market will pay, and at a profit, that company cannot repay the loan no matter how long the term is extended or how low the interest rate. There is no magic wand, no bold new plan that will solve the problem because whether you count on your toes or use a one megabyte microchip, two and two is still four in every language. Unlike a business corporation, a country has almost unlimited assets in its people, its government, its natural resources, its infrastructure and its national political will. As lenders, we can supply time for an adjustment process to work -- and they do work -- but we cannot put that process in place. That can only be done by the country itself. This observation is true of all governments -- yours, mine or any other. Bad economic policies can ruin any economy over time. We have all seen in our lifetime countries destroyed by inflation. recently we saw the city of New York almost go down, but we also saw it pull itself back to economic health by the novel economic device known as balancing the budget. Today, a few years after the scare headlines produced by some world leaders, New York city enjoys an investment-grade rating on its bonds and access to the market. There was no bold breakthrough, it was simple Benjamin Franklin economics.

Although people now love to focus on the approximately $40 billion of commercial bank interest payments on LDC debt and wonder what can be done about it, they often overlook the fact that this amount is about 11% of the $361 billion import bill paid by the developing countries. We all know that if the OPEC nations would drop the price of oil by $10 a barrel, or if countries selling manufactured goods would cut their prices and stretch out their terms, or if industrialized nations would mount massive aid programs, then no doubt things would improve for the developing countries in the short run. But in the longer run, all these measures would tend to relieve the pressure to build solid economic growth.

And so, too, would measures such as capitalizing interest on LDC debt. Whether you capitalize all future interest, or only that portion of it which exceeds a "reasonable rate" (whatever that might be), you do not cure the problem. you only hide it. The global marketplace will not be fooled. If the market perceives that a particular country prefers to issue an unlimited amount of its own interest capitalization notes, rather than do what it, and--only-it can do to regain its strength and discipline, then the market will shun this paper, no matter what its rate or tenor. National governments in all--countries have been debasing their-currencies-for more than 2000 years, and so there is very little mystery left about how they do this, or even how to stop it. We know what measures must be taken to right an economy over time, we know that the IMF has overseen dozens of successful programs and we know that the nature of these programs is similar no matter what language is spoken. They are all based on the fact no one can do for a borrower the things it must do for itself.

There were very few in Toronto, when the first wave of the debt crisis hit, who would have predicted how far we have come in the adjustment process. Mexico led the way, and 1983 was a year of sacrifice, adjustment and negative growth. These programs have worked. Mexico's public sector deficit fell from 18% of GNP in 1982 to 8.5% last year and will probably drop to 6.5% this year. Three years ago, the current account deficit was $13 billion and last year it became a surplus of $5.5 billion for a swing of $18 billion in two years. The trade surplus more than doubled to $13.7 billion. All this enabled the Mexican government to raise $5 billion in new money, which was first thought by some to be impossible and then said to be too little.

Out of this program, which is not without cost, growth will resume this year, probably at 2% to 3% and next year it should accelerate to 5% or 6%. All this was done by a skillful financial team and a determined government. It is a pattern that can be repeated by many other countries. During the world war two years, our democratic President, Franklin Roosevelt, sent his defeated republican opponent on a trip around the world -- a fact-finding mission. Wendell Wilkie produced a book whose message was contained in its title: "One World."

We have become one world was Willkie's message: it was considered a radical message in his day. And he was a bit premature. We are still divided by a huge array of problems, but one thing that is now clear is that we can no longer pursue independent fiscal and monetary policies without paying an enormous price. It is no longer possible to enrich yourself by beggaring your neighbor: although many governments -- urged on by some of their industries -- will continue to try. No matter which way we turn, it is now perfectly clear that we are all in the same boat.

Our assigned subject today is "the role of commercial banks in the prospective world environment." From the perspective of banks, I would suggest, the world environment is no longer a prospect: it is already here. There are enormous differences among nations and many of them are far more important than the problems of money and finance. But one thing is clear.

We now have one international financial marketplace in which money and credit move at the speed of light, day or night. Credit markets can no longer be measured exclusively by national savings and investment statistics; the money flows in and out, partly motivated by interest rates but more importantly by people's judgment about the relative political and financial stability of one or another country. Unfortunately, the list of currencies that people wish to place their life savings in is currently a very short one.

It may be hard for some in this room to admit, but commercial banks have very little ability to influence these events. The dramatic improvement in the balance of payments position of the 110 non-OPEC developing countries is a case in point.

This deficit in 1981 was about $108 billion; by 1983 it was cut almost in half to about $55 billion. This was done by the governments involved with the help and advice of the IMF. Those that were successful went back to basics. When governments tilt the landscape, money flows may reverse direction. Commercial banks are the conduits through which much of the world's money and credit flows. It is certainly possible to dam up the conduits, but if you do the ultimate result will be catastrophe when the dam finally breaks, as it surely will. The most productive role our commercial banks can play in the prospective world environment is to keep the conduits open and to play our traditional role of reminding all who will listen that there are no magic solutions to problems brought on by bad monetary and fiscal policies. These problems can only be cured by a return to sound policies. These policies take time to work, and while the banks can help supply that time only political will can put the proper programs in place. This is not a program to make headlines, but it is one that has worked in the past and will work in the future. I referred a moment ago to Ben Franklin's economics. He summed it up in two sentences: "If you know how to spend less than you get, you have the philosopher's stone...take care of the pence and the pounds will take care of themselves."