October 7, 2000
By Tim Costello, Brendan Smith & Jeremy Brecher
In a previous article, we argued that popular movements, progressives, and the left should develop their own program for a “new architecture” for the global economy and demand that policymakers bargain with them. While the global economy needs radical alteration in all its structures, this article focuses on the more limited question of what a left alternative for the global financial system should be.
Notwithstanding its extraordinary dynamism, capitalism has been marked throughout its history by cycles of boom and bust. Capitalism is based on unplanned interactions among independent “market players.” It lacks an adequate coordinating mechanism to create and restore balance other than through periodic crises. The paradoxical result is that a capitalist society may have idle productive capacity, unemployed people eager to work, a glut of products, and people in desperate need of those products—all at the same time.
This problem is intensified by markets that exchange not money and products but money and money—financial markets. Financial markets can aid the production of goods and services in the “real economy” by mobilizing and channeling resources across lines of space, time, and ownership. But in practice they tend to draw vast resources into attempts to make money out of money rather than out of real production. They are prone to their own booms and busts that can aggravate those of the real economy.
Through most of their history, capitalist societies have attempted to create organized mechanisms to deal with these problems through regulation. But it is usually difficult, since each capitalist firm is always motivated to pursue short-term individual gain at the expense of the system as a whole. Efforts to impose some degree of social responsibility on firms have usually been driven by multi-interest coalitions that include representatives of capital itself, government, and groups that are adversely affected, such as workers and farmers.
Capitalism grew up alongside a system of nation states and the nation state was and remains the primary mechanism used to attempt to organize and regulate capitalism. Coordination beyond the nation state was long left largely to imperial armies, colonial administrators, and the market—notably the market for gold.
In response to repeated banking crises, capitalist countries developed central banks to regulate money and credit. In the U.S., for example, the Federal Reserve Act required commercial banks to maintain a proportion of their deposits with the U.S.’s central bank, the Federal Reserve System (the “Fed”). The Fed can also buy and sell money on the open market. These techniques allowed the Fed to increase the supply of money and lower interest rates to stimulate economic activity—or to do the opposite (“monetary policy”). The Fed also regulates banks to limit imprudent speculation.
In response to the Great Depression of the 1930s governments also began to apply a strategy, promoted by British economist John Maynard Keynes, of using national government budgets to regulate economic cycles and compensate for inadequate demand (“fiscal policy”). They also expanded the regulation of markets through legislated rules and government agencies. The result has been called “nationally regulated capitalism.”
At the close of World War II, the victorious Allies, dominated by the U.S., attempted to establish a degree of regulation that went beyond the individual nation state. The 1944 Bretton Woods Conference established the International Monetary Fund (IMF), which supported fixed exchange rates among different national currencies. It also established a World Bank to aid reconstruction and development. John Maynard Keynes, the chief British delegate, advocated the creation of a world central bank to regulate global growth via an international monetary policy. The United States—which dominated the global economy with 40 percent of the world’s production—insisted instead that the U.S. dollar be the reserve currency for the whole system. This let the U.S. Treasury function as a world central bank, printing money as it saw fit.
Regulated capitalism and the Bretton Woods system contributed to the unprecedented period of sustained growth in the world capitalist economy from World War II to the early 1970s. But in the early 1970s capitalism entered a sustained worldwide crisis. Global economic growth fell to 2.5 percent, half its former rate.
In 1973, faced with a plunging dollar, the U.S. decided to renounce the quarter-century old Bretton Woods system of fixed exchange rates. Thus ended history’s most successful effort to organize and regulate capitalism globally.
The subsequent 25 years have been marked by deregulation or “marketization.” Interest rate restrictions, lending limits, reserve requirements, capital controls, and other means for national regulation of financial markets were largely dismantled. Banks became less important than weakly regulated institutional investors like pension funds, life insurance companies, mutual funds, and investment trusts. In the U.S., the share of total financial sector assets held by institutional investors rose from 32 percent in 1978 to 52 percent in 1993; similar though less extreme shifts occurred in other countries. These funds largely escaped the regulation that remained for banks.
Closely related to deregulation was a globalization of finance. In 1980, the daily average foreign exchange trading was $80 billion; today, more than $1.5 trillion flows daily across international borders. International bond and equity transactions of the G-7 (excluding the UK) increased from 35 percent of GDP in 1985 to 140 percent of GDP a decade later.
With exchange rates floating, the IMF lost its original function. As the debt of third world countries soared, it took on management of the debt crisis. The IMF began to require debtor countries to accept structural adjustment programs as conditions for new loans. It became, in effect, the global enforcer and collection agent for the world’s creditors.
Capital mobility undermined the ability of national governments to regulate money and credit and to pursue Keynesian growth policies. As economist Jane D’Aristo concludes, “the most damaging effect of the liberalization of global financial markets may be the loss of central banks’ power to implement counter-cyclical policies.”
The weaknesses of a system which might be described as “disorganized globalized capitalism” have long been easy to see for those with eyes to see them—and not just to critics on the left. In 1994, a group of international bankers, former top financial officials, and monetary experts from the world’s richest countries, headed by former U.S. Federal Reserve Board chair Paul Volcker, circulated a proposal to give the IMF “a central role in coordinating economic policies and in developing and implementing monetary reforms.” They argued that “there has been no reliable long-term global approach to coordinating policy, stabilizing market expectations, and preventing extreme volatility and misalignments among key currencies.” They proposed several immediate measures, to be followed by “a more formal system for managing exchange rates.” According to Kenneth H. Bacon of the Wall Street Journal, “The Volcker commission’s plan would, in effect, require countries to relinquish some of their economic sovereignty.” The Volcker plan quickly evaporated.
The results of the disorganization of capitalism—aka globalization and deregulation—were less than stellar. For the quarter century after the collapse of the Bretton Woods system, global growth remained at half its previous rate. The financial system lurched from crisis to crisis with only sporadic efforts at correction—and with devastating effects on people around the world.
Regulation for What and for Whom?
Proposals for a “new global financial architecture” have suddenly reemerged in the context of the 1997-1998 global financial crisis. Many of the mainstream proposals are primarily directed toward risk reduction for investors. A recent academic proposal, for example, states that “The predominant task of international financial regulation is to minimize systemic risk arising from the operations of securities and futures markets.”
The left should take a very different view of “the task of international financial regulation.” It’s not the left’s job to fix capitalism. It is the left’s responsibility to try to make economic structures benefit common people as much as possible and create the most favorable conditions for their expanding grassroots self-organization.
Further, the left should view change in the global financial system not as an end or a solution in itself, but rather as one part of a wider process of social change.
This suggests the spirit in which the left should approach proposals from economist Jeffrey Garten and others who advocate a global central bank. Actually existing central banks are profoundly undemocratic institutions. It is not just that they are insulated from day-to-day shifts in public opinion and legislatures. They are largely unaccountable to democratic institutions in their basic policies and objectives. Indeed, central banks don’t even represent the interests of capital as a whole so much as the specific interest of bankers and investors.
Some of the functions performed by central banks, however, are greatly to the advantage of ordinary people and of society as a whole, not just of capitalists. These include their counter-cyclical role (“monetary policy”) and their regulation of financial institutions to prevent them from destructive speculative excesses.
These are precisely the functions that have been undermined by globalization and financial deregulation. They are the ones the left should aim to restore via its new global financial architecture.
Governance
The new financial architecture the world needs is radically different from the current IMF. To make that clear the left should propose a new institution—for purposes of discussion let’s call it a Global Financial Facility—rather than a modification of the IMF. (That does not deny the likelihood that, in practice, the emergence of such an institution may occur via modifying the IMF.) To make clear that it will address the needs of all the world’s people, the GFF should be established as part of the United Nations system through negotiation among governments with major representation from NGOs.
As democrats, the left should advocate a one-person-one-vote structure for all new economic institutions unless there is a good reason to deviate from it. Neither the IMF/World Bank one-dollar-one-vote model nor the UN General Assembly one-coun- try-one-vote model comes even close. As an alternative, the left should propose that all nations joining the Global Financial Facility will be represented on its board of directors. Voting on the board will be weighted in proportion to the population represented. Representatives of civil society will have consultative status. Programs in specific geographical areas will develop means of accountability to the people they affect.
The purpose of the GFF will be to regulate the international financial system to avoid global recessions, promote sustainable economic development, ensure full employment, reverse the polarization of wealth and poverty, and support the efforts of polities at all levels to mobilize and coordinate their economic resources.
Structure
Most proposals from the left (and even Keynes’s original Bretton Woods proposals) provide global analogues to national monetary and fiscal policy. They generally propose some kind of banking facility to regulate the supply of money and credit and some kind of fund designed to provide counter-cyclical demand.
The GFF should establish an international bank to perform functions of monetary regulation currently performed inadequately by national central banks. It should:
- establish, in cooperation with national regulators, a system of minimum reserve requirements on the consolidated global balance sheets of all financial firms. Reserve requirements for non-bank financial institutions and the transnational operations of corporations and banks would bring regulation to the huge unregulated financial sectors that have burgeoned in the era of globalization and deregulation. Such regulation could help contain destructive speculation. It could also help counter the boom-and-bust cycle by restoring control of the national and global money supply.
coordinate efforts to reduce fluctuations in currency exchange rates through complementary national fiscal and monetary policies. (This is what the Bretton Woods Agreement originally created the IMF to do—and what it did rather well until the abolition of fixed exchange rates in the early 1970s.)
The GFF should also establish a public international investment fund. The purposes of the fund shall be:
- to meet human and environmental needs and ensure adequate global demand by channeling funds into sustainable long-term investment.
- to counter global economic cycles by appropriate expansion and contraction of fund activities.
Jane D’Arista has outlined one approach to such a fund. It would be structured as a closed-end investment fund which would issue liabilities to private investors and buy stocks and bonds of private enterprises and public agencies in developing countries in consultation with their governments. Its investment objectives would focus on “the economic performance of enterprises and countries rather than short-term financial performance.”
With daily international financial transactions now running at more than $1.5 trillion daily, an obvious source of support for the GFF would be a small tax on all international financial transactions. Known as a “Tobin tax” after its inventor economist James Tobin, such a tax would reduce destabilizing short-term international financial flows while providing funds for investment in long-term environmentally and socially sustainable development in poor communities and countries.
Policies
The GFF must follow policies radically different from those the IMF and World Bank have pursued for the past decade. It would:
- encourage countries to pursue economic policies based on domestic economic growth and development, not domestic austerity in the interest of export-led growth.
- encourage the shift of global financial resources from speculation to useful, environmentally positive, sustainable development.
- encourage the G-7 countries to work together to stimulate domestic demand and prevent global deflation.
- help countries adjust currency exchange rates without competitive devaluations.
encourage a return to more stable exchange rates in order to achieve the original purposes of the Bretton Woods agreement. - develop means for assuring global liquidity, such as an expansion of the system of Special Drawing Rights, in order to protect the global economy, especially poorer countries, from liquidity crises.
establish standards for and oversee the regulation of banks and all other financial institutions by national and international regulatory authorities. - pursue other measures to ensure global demand adequate to provide full employment and a rising standard of living.
The competition among corporations and national capital groupings is costly and destructive for the common people of the world. The question is, can the common people force them to limit their self-aggrandizement and conform to a somewhat greater extent to the needs of people and planet?
Systems of public regulation of markets can help or hurt common people. The left should not either oppose or support government or regulation in the abstract. Rather it should oppose those interventions which hurt and disempower common people and support those which help and empower them. Further, it should “push the envelope” to demand as progressive a content to regulation as the power of the left and its allies allows. Finally, it should view such regulation not as an end in itself, but as one piece of a broader process aiming to empower ordinary people. The same principles apply to international as to national regulation.
Supporting a GFF doesn’t mean the left should abandon grassroots struggles—far from it. Indeed, the left should support such an institution primarily because—and only if—it improves the conditions for such struggles.