In Memory of Allan G. Gruchy
New disputes are always arising in a market. If resolved, they result in new rules. If unresolved, they can accumulate until the market breaks down. I will address seven of the issues around which rules and disputes have swirled: (1) the international payment mechanism, (2) information, (3) second mover advantage, (4) trading rights, (5) property rights, (6) enforcement rights, and (7) sanctions. (See Fernand Braudel's great history  for the long view of the market.) After a brief discussion of these issues, I state my conclusions and suggest implications.
Issue 1: The International Payment Mechanism
The international payment mechanism is extremely important but widely taken for granted. It is also the most complicated of market issues. Therefore, my discussion starts with it and devotes the most space to it. The international payment mechanism is best understood by looking first at the foreign exchange market and then at the Bretton Woods system.
The foreign exchange market works according to a set of rules that are largely informal expectations of appropriate behavior. Those rules have changed dramatically over time. Up until the Great Depression, countries were expected to follow the rules of the gold standard, more or less. Nations had come to rely upon central banks as domestic lenders of last resort and tried to maintain a constant value for their currency in terms of gold. As it evolved, the gold standard also came to use the British pound as a key currency. (A classic financial history is Kindleberger 1996.) The whole system collapsed, however, during the Great Depression. The Bretton Woods system replaced the old gold standard after the Second World War. It started out as a fixed exchange rate system but changed into a floating system when the USA floated the dollar in the early 1970s. Today, each country is expected to maintain an exchange rate for its currency consistent with a rough and ready balance in its imports and its exports, with due allowance made for appropriate flows of financial funds into and out of the country. This expectation of global balance arranges countries into two groups, those who can and those who cannot meet the expectation. (See the technical note at the end of the text for a discussion of balance of payments accounting.)
The countries who can meet the expectations have hard currencies while other countries have soft ones. The countries with hard and soft currencies live on two opposite sides of a great divide separating the haves from the have nots. The countries with hard currencies have highly developed economies. Their currencies have stable exchange rates. They are usually powerful nation-states. Their people are predominantly pale and rich. They are in the "First World," where only a small portion of the human species lives. Their governments make the rules of the foreign exchange market. The rules work in their favor. They can usually follow the rules with ease. They are led by the United States.
The United States not only has a hard currency but it also has the key currency. The key currency has replaced gold as the principal form of official government reserves. The country issuing the key currency is the most powerful country in the nation-state system and is an ongoing contradiction. It is expected to run a balance of trade deficit while maintaining a roughly stable exchange rate. Occasional rate adjustments are to be expected, but the key currency country's trade deficit must result in sufficient payment outflow to provide the growing pool of official reserves needed by the other countries' governments. The U.S. payment deficit provides the liquidity needed for the global trading system to grow. While most countries that run huge trade deficits are accused of living beyond their means and are usually forced into making some very painful choices on pain of the collapse of their currency, the global payment mechanism in use today requires the USA to continue running huge trade deficits. According to the rules of the current global payment mechanism, the motto for the United States-leader of the hard currency nations with developed economies and high incomes--is "let the good times roll."
"Squeeze blood out of a turnip" is the motto for the soft currency countries. They have underdeveloped economies and low incomes. They have no leader, although Cuba would love to give it a try. Their currencies have unstable exchange rates that frequently decline and sometimes collapse. They are usually weak nation-states, frequently former colonies or dependencies. Their people are predominantly dark and poor. They are in the "Third World," where most of the human species live. Their governments do not make the rules of the foreign exchange market. Consequently, the rules work against them and they manage to follow the rules only with difficulty. They are usually countries that suffer chronic balance of payments difficulties and whose currencies constantly teeter on the edge of collapse. Although poor because of their international payments problems, they are said to be "living beyond their means." Their governments are considered incompetent and their people miscreants and malcontents. They are expected to deregulate their economy and to slash their government spending on welfare programs, to increase taxes on wages and wage goods, to raise interest rates, and to offer inducements to lure in more foreign investors. Their poor are just not poor enough and their rich are just not rich enough. When they actually manage to follow the rules of the foreign exchange market, they do so only through Herculean government effort. Such Herculean government effort is described as a reduction in government interference in the free market system. The policies expected of the soft currency countries may or may not reduce their global payments problems, but the policies do destabilize their political systems, cause deep recessions in their economies, and enrich foreign investors.
The Bretton Woods system involves four related organizations: (1) the General Agreement on Tariffs and Trade (GATT), (2) the World Trade Organization (WTO), (3) the International Monetary Fund (IMF), and (4) the International Bank for Reconstruction and Development (IBRD, or commonly known as the World Bank). The system was constructed by the most powerful nations in the world to deal with three related international conflicts that came to a head during the Great Depression. The conflicts were over (1) trade restrictions (GATT and WTO deal with them), (2) manipulation of exchange rates (IMF deals with them), and (3) defaults on international debts (IBRD deals with them).
A Brief History of GATT and the WTO
The market economies dramatically increased their tariffs in the depression in vain attempts to reduce unemployment. However, each time one country raised its tariffs, its trading partners retaliated by raising theirs. Everybody lost because the result was a strangulation of world trade, not an increase in employment. Furthermore, the growing protectionism increased animosity between countries. The General Agreement on Tariffs and Trade was organized to reduce these high tariffs and the animosity. It did so quite successfully by holding a whole series of negotiated reductions in tariffs.
The last negotiating round organized by the GATT was the Uruguay round launched in 1986 during the Reagan-Thatcher deregulation era. The Uruguay round of negotiations was concluded in 1995. The Uruguay Round also established the WTO. By the Uruguay round it had become clear to the powerful nations led by the United States and the United Kingdom that tariffs were no longer the major barriers to their growing international trade. Regulatory barriers instead of tariffs were increasingly being used to restrict imports. What was needed was regulatory uniformity that treated the goods and services of all countries in a nondiscriminatory fashion. This is regulatory "harmonization," the practice employed by the European Union as it forges the once-separate economies of Europe into a united one. In this economic unification of Europe, the myriad of market rules originally established by each country are being blended into one harmonious set of rules. The same sort of thing is required on the much larger international scale. However, although what is needed is an international organization that supports harmonization, what was provided is one that supports deregulation. The two paths to globalization are strikingly different.
The WTO was created to deal with regulatory barriers to international trade. It has begun doing so in a most alarming manner. It is deregulating international trade. Deregulation is the wrong path to globalization. It will not create equality and abundance. It will bring more sweatshop working conditions, environmental deterioration, and social stratification. The harmonization path is the right path to globalization. Harmonization does not eliminate the social control of business and technology but preserves the opportunity to use such social control to pursue equality and abundance.
The Briefest-Ever History of the International Money Fund
In the depression years, countries slapped tariffs on imports to close off their home market from foreign competition and raise home employment and profits. They also engaged in competitive devaluations of their currencies to achieve the same thing. The IMF was organized to maintain a global trading system based on fixed exchange rates, on rates...