Some 2300 years ago, Plato wrote of the forms of government and their relative virtues. According to Plato, the forms of government from most to least virtuous were "aristocracy", "timocracy", "oligarchy", "democracy", and "tyranny". More interesting for our purposes today, he wrote of the transition processes between the different forms. Paraphrasing the philosopher, corruption of man's understanding of their ideals is the root cause of the decline, which explains, to me at least, Plato's emphasis on the permanence of ideas in his epistemology. What, however, is corruption and why is it a problem?
One on-line dictionary defines the term "corrupt" as:
That is, in a sense, corruption is that state where the object in question is not what it seems. What is the mechanism by which corruption inspires men to adopt new forms of government? My guess is that, upon discovering that the current practice of government is corrupt, that is, not what it seems, a new form is chosen. As an example, the Western world followed a monarchical system of government until conditions arose wherein the people came to realize that the King was not acting as a King "should" and were prepared to act on that belief. This sense, focused and directed by opposition forces, led to the creation of more constitutional forms of government, which, from time to time, proved equally susceptible to corruption.
I dwell on the topic as I believe the current international financial system is corrupt, in the sense that it is not what it seems, and that conditions conducive to change might be arising in the near future. What conditions might those be? you ask. Economic down cycles have usually coincided with pressure on political systems, and as I think this down cycle will be longer and more severe than the world has seen in a few decades, I think the pressure to either change or reform will prove quite strong.
Before completing the argument, let me restrict the sense of corruption so as to avoid confusion. In common language use, at least according to Lexis-Nexis, corruption is usually associated with criminal figures, or misappropriation of funds. This is not the sense of the term I intend to use. I am not arguing that the global monetary authorities are lining their pockets. Indeed, were the global monetary authorities to vote to raise their salaries 10-fold, I would not call this corruption so long as it was done transparently and in accordance with convention. However, a 10% pay hike that occurred out of the public eye and outside of convention would inspire me to apply the "corrupt" label.
This is to argue, in contrast to Plato, that forms of government are not inherently more or less corrupt, but rather that the actions of the people within the various institutions are corrupt or not based on their transparency and accordance with the relevant conventions. Democracy, to take one of Plato's least favorites forms of government, can be seen to be virtuous or corrupt based on, inter alia, the acceptance of both ruler and ruled to the will of the people. That is, to believe in Democracy is to believe that the best societal results are obtained by honestly seeking the will of the people. Demagoguery, then, would be a sign of corruption in a democratic society in that the will of the people is not being honestly sought but manipulated.
Oliver Wendell Holmes Jr. argued, as an expression of his faith in the democratic process that, "the best test of truth is the power of the thought to get itself accepted in the competition of the market, and that truth is the only ground upon which their wishes safely can be carried out. That at any rate is the theory of our Constitution. It is an experiment, as all life is an experiment." I read this as a sign of faith in that he sees the American system as an experiment, not something this is virtuous in its own right.
The adoption of John Law's system of money was such an experiment. This experiment has progressed from an add-on to the well established, private sector enforced, by virtue of the relative holdings of assets, hard money system, to a state enforced hard money system, to a, supposedly, free floating system of exchange. This free floating system of exchange obligates, according to the Articles of Agreement of the IMF, the members to:
(i) endeavor to direct its economic and financial policies toward the objective of fostering orderly economic growth with reasonable price stability, with due regard to its circumstances;
(ii) seek to promote stability by fostering orderly underlying economic and financial conditions and a monetary system that does not tend to produce erratic disruptions;
(iii) avoid manipulating exchange rates or the international monetary system in order to prevent effective balance of payments adjustment or to gain an unfair competitive advantage over other members; and
(iv) follow exchange policies compatible with the undertakings under this Section.
said undertakings include;
Under an international monetary system of the kind prevailing on January 1, 1976, exchange arrangements may include (i) the maintenance by a member of a value for its currency in terms of the special drawing right or another denominator, other than gold, selected by the member, or (ii) cooperative arrangements by which members maintain the value of their currencies in relation to the value of the currency or currencies of other members, or (iii) other exchange arrangements of a member's choice.
As I read it, IMF member countries are prohibited from adopting a Gold standard, and instead are expected to follow "best practice" economic policies. These best practices include acceptance of the effects of market adjusted exchange rates on the real sector as means to restore balance of payments imbalances as per the prohibition of manipulation of exchange rates. Yet, the history of the current experiment in foreign exchange is littered with interventions to forestall the real sector adjustments necessary to restore balance in the balance of payments. Consider the US-Japan trade battle where both parties have, from time to time, intervened to weaken the Yen, avoiding the effects of the market response to the balance of payments problem, i.e. a strong Yen. Consider as well the recent statement by IMF MD Horst Koehler that "there comes a point in which a further rapid depreciation of the dollar demands that some governments and central banks must get together." This is not a statement of faith in the market process as means to signal more optimal resource allocation.
Faith in the system of exchange, among adherents, was broken, I contend, by the crash of 87. Prior to the crash, member nations were more willing to accept the effects of exchange rate directed balance of payments adjustments, as evidenced by the Plaza Accord. Since the crash, slowly but surely, faith was replaced by propaganda. In a sense the IMF system morphed from a faith into a brand or from a means to an end into an end in itself. Yet, how can a system be seen for long as an end in itself when member countries flout their obligations?
I have come to believe that fiat money eventually leads to financial system collapse but even so, I do not take issue with the current experiment. It was always possible that new technology might solve the earlier intractables and probable that people would come to believe such. However, I do take issue with the corruption of the system. If you want to experiment, and can implement it within the context of the relevant constitutions or conventions, have a go but don't forget that it is an experiment. Cloaking a failed system, defined as that point when professed adherents don't adhere, with the mantle of perfection is, to my mind the last stage in the life cycle of ideas. In other words, the god of free floating exchange rates died years ago and all we have left is "reflexive" reactions which are ever more muted as the interventions become more pervasive.
It seems to me the bane of society is to forget the wisdom expressed by Holmes. Life is an experiment. The means we chose to achieve our ends are various, and as argued by one of Holmes' contemporaries, William James, we should always be alert to the efficacy of our means in reaching our goals. I agree with the aims of the IMF, but I think even they would privately admit that the current means to those ends is ineffective, else they would be acting in accordance with their professed obligations. To the extent that a just system of exchange leads to harmony among nations, and as, in contrast to the 1990's visions of a seamless world, we are still a world of nations, the current climate of rising tensions suggests something less than just and thus pressure for a solution..
June 11, 2003