The roundtable was convened at 10:45 a.m., Saturday, March 31, by its moderator, Jose Gabilondo of the College of Law, Florida International University, who introduced the discussants: Timothy Canova of Chapman University Law School; Erika George of the University of Utah College of Law; and Robert Wai of Osgoode Hall Law School. *
INTRODUCTORY REMARKS BY JOSE GABILONDO ([dagger])
Welcome to "A Multiplicity of Actors and Transnational Governance," a roundtable dedicated to looking at trends in the new institutionalization of transnational law. While public international law has generally recognized as subjects only states and state-substitutes like multilateral entities, new private and quasi-public actors have emerged as a result of globalization. Our goal this morning is to consider the implications of some of these actors to traditional conceptions of international law. Three of our panelists will consider some discrete issues in institutionalization in the context of central bank capture by private financial actors, corporate as a source of "soft law" in international human rights, and worker remittance liquidity as a new transborder actor. Our final panelist will integrate these perspectives into the conference's larger theme, the future of international law.
NON-STATE ACTORS AND THE INTERNATIONAL INSTITUTIONAL ORDER: CENTRAL BANK CAPTURE AND THE GLOBALIZATION OF MONETARY AMNESIA
By Timothy A. Canova ([double dagger])
The role of private, non-state actors in the international institutional and legal order is often praised by scholars as a progressive development that promises greater pluralism, public participation, and transparency in the formulation of legal norms. (1) Often overlooked, however, are the ways that non-state actors undermine the sovereignty and practical capabilities of nation-states to provide for the welfare and security of citizens. Threats from particular non-state actors such as private terrorist networks have received wide attention, but less visible and arguably much more significant is the growing influence of non-state actors in the global financial system. (2)
The enormous growth of global capital and currency markets, fueled and dominated by non-state actors, has undermined the ability of states to incur deficits, even modest deficits by historical standards, or to otherwise stimulate their economies. (3) The scale of cross-border money flows has also largely overwhelmed the regulatory efforts of nation-states, which are often underfunded and unilateral in scope. As a result, nation-states have become increasingly powerless to prevent or even monitor the movement of all kinds of wayward funds, from the stolen millions of corrupt foreign officials to illegal drug money, terrorist financing, and the billions of dollars seeking offshore tax havens. (4) This regulatory vacuum also skews our public policies and discourse on a number of issues, such as foreign aid and public investment which are more easily opposed as wasting taxpayer dollars to corrupt regimes. The problem is thereby seen as their corruption, not the corruption of our legal systems, our payments systems, our banking facilities, our bank secrecy laws, and our failure to implement cooperative capital controls or any kind of effective multilateral regulation of finance.
Non-state actors also shape today's global order by capturing the institutions of the state, contributing to the problem of "democratic deficits": the regulated industry captures the regulator, often with promises of future employment (the so-called "revolving door"), inducements of political support, and campaign contributions. The capture of the two aging Bretton Woods institutions, the International Monetary Fund and the World Bank, has been widely noted by critics of the Washington Consensus such as Grotius Lecturer and Nobel laureate Joseph Stiglitz (5) and other leading economists. (6)
In contrast to this scrutiny of Bretton Woods institutions, there has been a relative silence about the capture of central banking institutions, perhaps the most significant agency capture by non-state actors in today's international legal order. The capture of foreign central banks, regularly pushed as an IMF loan conditionality, has been largely modeled on the "autonomous" Federal Reserve. It is a model that de-links central banks from any significant democratic political control or direction. The autonomous Fed, in turn, reflects a distinctly biased reading of history, one that forgets an entire decade of Federal Reserve history, 1941 to 1951, which strangely happens to be the most successful decade in U.S. economic and social history.
This forgotten decade of U.S. monetary history included massive federal spending on World War II and the two most expensive Cold War programs, the Marshall Plan that rebuilt much of post-war Europe and Japan, and the G.I. Bill of Rights that provided education, housing, and jobs to more than 16 million returning U.S. war veterans. There were several distinctive features about this period: federal spending and real economic growth were magnitudes greater than before or since, and the Federal Reserve was not functionally autonomous but, rather, was under the strict direction of the Treasury Department. (7)
Federal spending did not just double or triple during World War II. It rose more than fifteen-fold, from $6 billion in 1940 to $95 billion in 1944, from about 10% to 43.6% of gross domestic product (GDP). This boost in federal spending fueled an economic boom that won the war in less than four years, with real (inflation-adjusted) economic growth rates above 15% for three consecutive years and averaging double digits throughout the war. The economy doubled in size in less than five years. (8) By comparison, today's federal spending is about 20% of GDP, (9) and in the five years since September 11th, real U.S. economic growth has been less than one-fifth of the peak World War II growth rates. (10)
Where did the federal government get the financial resources for such massive spending programs? Although federal income taxes were much higher than today, taxes covered only about 41% of war costs. The rest was borrowed by the Treasury Department through its bond sales. The federal government debt rose from 50% of GDP at the beginning of the war to 120% of GDP soon after the war ended, and throughout the Marshall Plan/G.I. Bill period it remained mostly over 90%. Today, the federal debt is about 65% of GDP. (11)
Although most of the federal debt was held by the public, the Federal Reserve was forced to purchase significant amounts of Treasury debt to maintain a low interest rate for federal borrowing. For much of the "pegged period," interest rates on U.S. government borrowing were pegged at 0.375% for short-term ninety-day Treasury bills and 2.5% for long-term (ten-year) Treasury bonds. The Fed was required, by convention with the White House and Treasury, to purchase government securities at any price and in any amount necessary to keep interest rates at these pegs.
With an inflation rate that averaged about three percent a year during the final three years of the war, the federal government was borrowing at negative real interest rates. (12) Quite simply, under such conditions, it paid to borrow and spend, and not surprisingly, the nation-state boomed, and no problem at home or abroad seemed too great for solution. (13)
This arrangement--a politically directed Federal Reserve, neutralized monetary policy, and hyperactive fiscal policy--was recognized at the time by every finance text, economics text and monetary history, and from every ideological camp. It was accepted by the Fed itself as a necessary and established fact of life. According to Lester Chandler's seminal text, The Economics of Money and Banking, the Fed "stood ready to buy without limitation" the range of government securities to maintain the pegged interest rates. (14) The comparison with today's texts in economics, finance and history is troubling. The pegged period of 1941-1951, the most impressive decade of U.S. economic growth, has been airbrushed away. (15) It should be no small wonder that most Ph.D. economists and M.B.A. graduates are completely unaware of the pegged period and accept Federal Reserve autonomy as a matter of faith.
As John Maynard Keynes once observed, "In economics you cannot convict your opponent of error, you can only convince him of it." (16) But apparently there is no convincing an economics establishment that simply ignores the empirical evidence and has a vested interest in the ideology of an autonomous central bank.
Legal scholars have largely deferred to the amnesia of the economics establishment. (17) There have been numerous constitutional challenges to the Federal Reserve's unique institutional structure which conducts monetary policy through its Federal Open Market Committee that includes significant private representation, the privately-selected regional Federal Reserve Bank presidents. The challenges, based on the Appointments Clause as well as the private nondelegation doctrine, have all been...