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Clintonomics, the Information Revolution and the New Global Market Economy
January 25, 1993
Walter B. Wriston


Introductory Remarks

Good afternoon, ladies and gentlemen and welcome to our Independent Policy Forum for today. My name is David Theroux and I’m President of The Independent Institute. We’re delighted to have you join with us and we hope that you’ll thoroughly enjoy today’s program.

For those of you who are new to The Independent Institute in the packet, which I’m sure you’ve all noticed at your seat, includes information about our program. The Institute is a non-profit scholarly research and educational foundation which sponsors comprehensive studies of critical, social and economic issues. The results of this work are published as books and other publications and form the basis for numerous conference and media programs. The Independent Policy Forum is a seminar series sponsored by the Institute and the forum features, as with today’s speaker, outstanding experts from business, government, the media, academia, and each speaker addresses major economic and social issues especially as they relate to important to new books. As with all programs sponsored by The Independent Institute, the Independent Policy Forum adheres to a stricter standard or policy of non-partisan, non-politicized inquiry.

Upcoming Independent Policy Forums will include or feature such speakers as Robert Bartley from the Wall Street Journal and his book, The Seven Fat Years. John MacArthur, publisher of Harper’s and his new book, The Second Front. In addition, we will have Michael Medved, co-host of PBS’s Sneak Previews. Richard Vedder who is co-author of a new book from the Institute which also is discussed in your packet called, Out of Work. And finally, Tom Peters, one of our advisors, and his new book called, Liberation Management.

Incidentally, those of you who are not members of the Independent Institute may be interested in joining in order to receive discounts on future forums like this, as well as discounts to other kinds of conference programs. Independent Institute Associate Membership includes receipt of various Institute publications including new books that we are producing.

The subject of today’s program may be the single greatest economic and political influence of the 1990s and beyond. Namely, the rapid acceleration of information development and distribution. The decentralization of control over information and the consequent leveling of hierarchy in business, government and perhaps even society at large. The industrial revolution, as many of us know, ushered in the modern economic day, modern economic age.

The new information revolution is truly transforming national markets into a single global market. For those of you who have not seen a copy, Walter Wriston’s new book, The Twilight of Sovereignty, details how the new technologies are linking people around the world, changing them and the world irrevocably in politics, business, culture and much more. We have a new administration in Washington yet the information revolution has eroded the power of politicians and bureaucrats to control our lives and our well-being including those of totalitarian or former totalitarian and authoritarian regimes.

The ability of governments to cater to special interests by manipulating the supply of money, economic transactions and the very information for entrepreneurship and economic processes has greatly declined. And the increasing international production of goods is making the concepts of imports/exports and trade balances outmoded.

Also in your packet you’ll find a copy of an article from a recent issue of Forbes by our speaker entitled, “Big Brother We Are Watching You.” And the author of the article is none other than Walter Wriston. Mr. Wriston is Chairman Emeritus of Citicorp and Citibank, having served as Chief Executive Officer for seventeen years. He’s a graduate of Wesleyan University and the Fletcher School of Law and Diplomacy at Tufts University.

In addition to Twilight of Sovereignty, he is the author of the earlier bestseller, Risk and Other Four-Letter Words, of which we also have copies for those who are interested. Mr. Wriston is also former Chairman of the President’s Economic Policy Advisory Board and Co-Chairman of the Business Roundtable. He is currently a Director of Bechtel Investments, Bio-Research Laboratories, Chubb Corporation, Cygnus Therapeutic Systems, General Electric, ICOS Corporation, Sequoia Ventures, Tandem Computers, United Meridian and York International Corporation.

There are precious few individuals with a combined business experience and leadership plus extensive knowledge of economics and a host of other fields like that of our speaker. Hence it gives me great pleasure to present Walter Wriston, who will speak on “Clintonomics, The Information Revolution and The New Global Market Economy.” Afterward we’ll have time for questions. [applause]

Walter B. Wriston

Thank you very much, David, it’s a real pleasure to be here in San Francisco, particularly since the rain is over, and we’re all much better off. This morning I’d like to talk to you a little bit about what I think may happen in this Administration when it faces some of the problems that are lurking out there.

Whenever you and I think about the world and the never-ending stream of events that capture our attention, we tend to break the passage of time into sort of neat segments delineated by years or months. But, the world moves on at its own pace and it pays very little attention to these man-made metrics.

The new Clinton Administration, which has just taken office, will find, in my view at least, a new world waiting for it that has been years and years in the making.

During the campaign we all heard a great deal about change. Each candidate running for office vied to be the candidate of change. And if one listened to the rhetoric or even the music at the Inaugural Ball, it’s clear that much of the change suggested is merely an attempt to return to yesterday. The problem is that the world of yesterday no longer exists. Indeed, I would suggest to you that we find ourselves in the midst of a great transition that is working for fundamental changes in the structure of our society and of the international society.

Despite the campaign verbiage about the decline of American manufacturing, the percent of our gross national product contributed by manufacturing has not changed in any significant way in the last 10 years. But, what has changed is that the number of people employed in that sector has been rapidly declining as the productivity has gone up.

Indeed, the American worker is the most productive worker in the world, but these manufacturing jobs which have disappeared and which were the mainstay of many of our societies, are never going to come back anymore than we will ever again see American farms employing 20 million people who worked on the farms at the turn of the century.

These massive historical transitions are not only disruptive, but they’re often very painful. But, also, they upset very long-held beliefs requiring us to think anew about new problems—itself a terribly painful process. The Industrial Age, in which we all grew up, is slowly fading into an information society in much the same way that many would wish that it would do that we could go back again to the old Industrial Age. But as a friend of mine, a journalist, Mike O’Neill, once put it “today’s world cannot be remodeled with yesterday’s memories.”

There are no U-turns on the road to the future. This is the basic reality with which the Clinton Administration will have to deal. Old solutions will not yield answers to tomorrow’s problems.

Examples of this abound. The information revolution has been often announced by futurists, but many of the things and the innovations that have been predicted have just never arrived. No one has yet seen a paperless society nor a helicopter in every backyard.

What we have seen and said is that information technology has demolished time and distance, But instead of increasing the power of government and, thus, validating Orwell’s image that Big Brother watched our every move, that proposition has been stood on its head and we have all wound up watching Big Brother. No one who has lived through the last few years and watched on television as the Berlin Wall came down or the first protestors in Prague in 1988, shaking their fists at the riot police and saying “the world sees you” and the world did see us.

And none of us can fail to understand that information technology is changing the way we think about the power of government; about the way the world works, the way we work and, indeed, the very nature of what we call work itself. This massive upheaval in the former Soviet Union is a case in point.

While governments maintain elaborate intelligence gathering facilities, when a crisis arises anywhere in the world, eyes in all countries turn to the CNN monitor, which is standard furniture in every government crisis management office around the world. The foreign minister of the former Soviet Republic, Eduard Shevardnadze, during the Yeltsin coup put it this way in his new book, Praise Be Information Technology, Praise Be CNN: “Anyone who owns a parabolic antenna was able to see that network’s transmission, and had a complete picture of what was going on.” And this from a senior officer of what used to be the most closed and secretive society in the world. The only ones in Moscow who did not know what was going on was the American Embassy, which did not have CNN. [laughter]

Now while historians very rarely identify these sea changes while they’re living through them, I would argue that the signs around us are unmistakable. That we’re now in the midst of a new revolution at least as dramatic and as far reaching as that which the great historian, Paul Johnson, described as the birth of the modern world in the late 19th century.

Now different people, you and I, see different talismans as we’re all the product of the velocity of our own experience. Social analysts see social and political change. Scientists see change in their own specialties. But the start of this revolution may, perhaps, be dated in this country from the passage of the G.I. Bill of Rights, which made it possible for so many of us, returning service men and women, to get a college education and to begin to build the base of what Peter Drucker has called “knowledge workers.” The importance of intellectual capital to the future of the world is not lost on the people of what used to be called the “Third World.”

Today, more than half of all the college graduates in the world are from the Third World and, indeed, to give you a metric, Mexico has more graduate engineers than France. And India has more graduate engineers than all the countries in the common market put together.

By the year 2000, it’s estimated that students from developing nations will make up three-fifths of all the university students. The idea has gotten through to large segments of the world that economic progress is now largely a process of increasing the relative contribution of knowledge in the creation of wealth.

Knowledge at one time was a kind of an ornament that the rich and powerful used to display at conferences, but it is now combined with management skills to produce wealth. The vast increase in knowledge in the last decade has brought with it a huge increase in our ability to manipulate matter, increase it’s value by the power of the mind, generate new substances and products, unhinted of in nature, and undreamed of 10 years ago.

But the world, I would argue, is changing not because computer operators have replaced clerk-typists but because the human struggle to survive and prosper now depends on an entirely new source of wealth. It is information applied to work to create value. Information technology has created an entirely new economy—an information economy as different from the industrial society as the industrial was from the agricultural society. And when the source of wealth changes, the politics of nations will change as well.

There are many in the new Administration who long for the increased regulation of all phases of our society. Sometimes the concept is expressed as industrial policy, and sometimes in more primitive terms. But whichever way it is phrased, it is designed to increase the power of government, and in an economy whose products consist largely of information this power erodes rapidly.

George Gilder, one of the great independent thinkers of our time, has written, “a steel mill is the exemplary industry of the Industrial Age and it lends itself to control by government. It’s massive output is easily measured and regulated at every point by the government. By contrast,” he says, the typical means of production and in the new epoch is a man at a computer workstation designing microchips comparable in complexity to the entire steel facility to be manufactured from software programs comprising a coded sequence of electronic pulses that can elude every export control in the world and run a production line anywhere in the world.”

So intellectual capital is the most mobile of all capital in the world. It will go where it is wanted and it will stay where it is well treated. It will flee from manipulation or onerous regulations of its value and use, and no government can restrain it for long.

The President, in his inaugural address, acknowledged that investment is mobile, but he gave no hint as to whether his Administration will try to create the conditions to attract that capital.

The pursuit of wealth is now largely the pursuit of information and the competition for the best information is very different from the competition for the best bottom land. Today, the proliferation of information technology, ranging from the telephone, to the fax machine, to fiber optic cable, has flooded the world with data and information moving at or near the speed of light to every corner of the world.

This does not mean that this is only more of the same. It’s a very well-established principle that a change in degree, if carried far enough, will eventually become a difference in kind. In biology that’s how new species are created and old ones die out.

Speed is what transforms a harmless piece of lead into a deadly rifle bullet, and this explosion of information and the speed at which it is transmitted has created a situation that is different in kind than just in degree. This change affects not only the creation of wealth, but also military power, the political structure of the world, and thus our international posture.

For thousands of years news could move just as fast as a horse could run or a ship could sail. Military power was similarly impeded. Indeed, the great armies of Napoleon could move no faster than those of Julius Caesar. Great national leaders were totally unknown to most people. Only those who had met them personally could recognize them.

Today the mini-cam is omnipresent. But in the late 18th century, there were no photographs of Washington or Jefferson, and indeed the Tsar of all Russia traveled through Europe for three months and was never recognized.

So, today, however, the ability of the sovereign to keep information secret, and thus a tight grip on power, began to erode basically with the invention of the paved road and the optical telegraph and the newspaper.

Richard Brown has observed that when the diffusion of public information moved from face-to-face conversation to the newspaper, public life and society in which politics operated shifted from a command discipline to a market-oriented competition regime in which the foundations of influence changed.

I must say that governments of all stripes have viewed these changes with a wary eye for a long, long time. In 1835, Emperor Francis I of Austria turned down a request to build a steam railway lest it carry revolution to his throne. He was more right than he knew.

Years later, with the advent of the telephone, another sovereign saw danger in an information society. Leon Trotsky reportedly proposed to Stalin that a modern telephone system be built in the Soviet State. Stalin brushed the idea off saying, “I can imagine no greater instrument of counter-revolution in our time.” Now, what would Trotsky and Stalin have thought if they had lived to see the Yeltsin coup, which utilized an independent computer network, called Relcom, that links Moscow with 80 cities across that continent? And Cannon was plugged into similar computer networks in Europe and the United States to spread the news of the coup?

Even more ironic was that after the KGB blocked most of the trunk lines in the Russian telephone system, Yeltsin communicated with his greatest ally, the Mayor of St. Petersburg, via the government’s own proprietary telephones network. This is in sharp contrast to the fact that the news of the abdication of Tsar Nicholas years ago took about four weeks to travel across the Russian area.

In America, every new administration comes into office with an agenda and the seven o’clock staff meetings in the Roosevelt Room are full of optimism. After a month or two, the meetings open with a different set. “Did you see what the Post said this morning, or what Brokaw said last night, and what is our response?” And as Jack Kennedy once remarked “the ship of state is the only ship that leaks from the top.” [laughter] This administration has already experienced that.

Whether you can argue, and you should whether or not this kind of an atmosphere is a way to set good public policy, the reality is that’s the way we have to operate in today’s world.

There are other realities that President Clinton will face in the new world. Ferdnand Braudel, in his great historical work, has written that a sovereign’s first task is always to secure obedience to and gain for itself a monopoly on the use of force in any given society, neutralizing all challenges inside it and replacing them with what Max Weber once called “legitimate violence.”

In the Middle Ages, the governments at that time took over the private armies of the feudal lords and of the city-states and created a monopoly of power which build the nation-state. Today, the new Administration will find, I believe, that once again, we are facing new private armies, not loyal this time to feudal outlaws, but terrorists controlled by small countries with a huge explosive ability or even controlled by factions within countries, and no one understands the power of information technology any better than the modern terrorists.

You will recall that the terrorists who stormed the American Embassy in Tehran on November 4th, 1979, were equipped with their own television cameras and their own microwave uplink to Iranian television. U.S. television outdid themselves to cover this event.

Indeed, ABC’s Nightline, now a fixture of late night television, was originally created to cover the hostage crisis every day. They gave the terrorists what Margaret Thatcher once called, “the oxygen of publicity.” Whatever your view of the matter, few would doubt that it presents difficult dilemmas for any government.

These are just some of the problems that are too big for any one country to handle and terrorism is one of those. Many years ago, the United States and other governments came to the same conclusion about piracy, and they banded together to outlaw the practice.

Slavery is another case in point. The first significant international agreement was reached in 1885, and was followed in 1890, by the Brussels Act, signed by 18 countries. The security of our modern states under whatever administration may well require similar joint treaties to outlaw terrorism.

All of these events are being played out against a background of massive shifts in the political structure of the world. There are fewer and fewer dictatorships and more and more democratic regimes. But at the same time that freedom is sweeping the world, old tribal values are being reasserted, and we will see more not less nations being born. This is good news for the people of the world but it makes the practice of diplomacy and the formation of our national security problems difficult.

Dealings between superpowers is a—[break in tape]—they have a geo-synchronous satellite. Put it this way. Radio waves have never respected frontiers. And from an altitude of 36,000 kilometers, national boundaries, he said, “are inconspicuous.”

Satellites, today, peer down into every corner of our nation state. Data and news are received by people within national boundaries on every device from a hand-held transistor radio to a person in a jungle, to personal computers tied in to huge networks and connected across the globe.

In short, the government today, any government, has totally lost control of what people can see and hear and they can no longer maintain the fiction that there are no alternative political solutions. But not only does this information revolution make the assertion of territorial control impossible with regard to what people can see and hear, but I would argue that it also makes it a good deal less relevant in a lot of other ways. The physical control of property has always been one of the most important elements of sovereignty, but this control in many respects is also fading away.

Not long ago, for example, armies fought and men died for the control of the Rohr Valley, because the control of the iron and steel in the Rohr Valley conferred very great political power upon those that owned it. The same was true of the rubber in Malaysia. Today, these once-fought-over assets may indeed have turned into liabilities, as synthetic materials, plastics and other things have come to take their places.

Even the control of so-called geographic choke points have lost some of their significance that they once had. A few years ago, for example, it was the conventional wisdom that all the lights would go out in the world if the Suez Canal was ever closed. The power of the sovereign state—in this case, Egypt—to block the flow of oil from the Middle East was believed to be absolute. The conventional wisdom didn’t take into account the technology that would permit the building of a supertanker that could carry oil around the Cape of Good Hope economically. And this type, this velocity of change, is now shifting the tectonic plates of power all over the world.

But whatever facet you think about and people discuss, in the end the central concept of a state’s sovereignty is that their decisions of the state are not subject to contradiction by any other power. As a matter of fact the development of this concept dates back to Roman laws, moves through the absolutism of Bodin in the 17th and 18th centuries to Hobbes and Locke and Rousseau. But whatever ruler was in power, he or she could always find a political philosopher to validate their assertion of power.

But the information revolution has now given history a new reverse twist which stands that conventional wisdom on its head. So great is the desire of many nations for the approval of the world that they call in outsiders to validate their own national elections. This is so extraordinary a development in international relations and it’s far removed from the assertion of absolute power in conducting a nation’s internal affairs.

Consider, for example, the counsel of freely elected heads of state who Noriega called to Panama to observe the election. Former President Jimmy Carter and some European counterparts told the world in no uncertain terms that the Panamanian election of 1989 was crooked, and in a sense he paved the way for the American military action which followed. This same group of people were asked to verify the Nicaraguan elections of 1990, and gave their seal of approval, which started that country along the road to build a fragile democracy.

World opinion is focused and illuminated by the global television net, and it has achieved what few, if any, armies in history could ever have achieved. The same pressure that I described is felt in the field of human rights, which is rapidly becoming a world concern transcending all national sovereignty.

Today, as the chanters in Prague at the police said “the world does see you,” the cold print in the newspaper has now moved to have a human face in living color and in real time. It makes all the difference. The Kurds, for example, have suffered from subjugation on and off by others since the Arabs conquered them in the 7th century. But it was the image of horror on CNN last year that awoke the world to their plight. Indeed the history of the last few years has seen the growing popular support for the rights of the individual in all nations against the prerogatives of the sovereign wherever located.

The beginning of intelligence gathering has played such a big part in national security, whatever new team the President appoints to take over the various sectors of our intelligence agency, they will find very quickly that while the agent in place still plays a vital role, that information technology has made it us both more secure as a nation and also more vulnerable. Weapons of war are no longer the exclusive product of the armorer’s art.

It’s generally estimated now, for example, that software is 80 percent of the United States weapons systems which are now in development. From the point of view of our enemies, attacking the software that controls or operates weapons is probably the most cost efficient and cheapest way to cripple the defenses of the country.

Extensive work on this proposition has been done by Scott Borman of Yale and Paul Leavitt of Boston. Software attacks, they have written, can strike key civilian targets such as electronic fund transfers systems, air traffic control systems, and even vote tallying machinery, the heart of the democratic process.

These so-called logic bombs, which were planted in the computer software at the Los Angeles Department of Water and Power in the Spring of 1985, made it impossible for that utility to access their own records for more than a week.

In today’s world, wars can be won or lost in a week. If nothing happens when the President presses the button, if our communications network froze and our radar failed to function, our defense posture would be significantly and dramatically changed.

With the story of the John Walker family fresh in our minds, it does not take much imagination to imagine that some software program might sell out to our adversaries and plant a few logic bombs to disrupt our military response. That would be a very cheap way to attack and is open to very small countries, to say nothing of terrorists.

Lest this sound to you like some science fiction, we should remember that as long ago as 1985, a hacker who turned out to be in Germany broke into the computer files of the Lawrence Berkeley Laboratories, to say nothing of about a dozen United States military bases. A man called Clifford Stohl tracked the hacker to Germany where it was discovered he was selling the output to the KGB.

Stohl summed up the problem from the point of view of national security this way. “I might train an agent,” he said, “to speak a foreign language, fly her to a distant country, supply her with bribe money and worry that she might get caught, or I could hire a dishonest computer programmer. Such a spy need never leave the home country, and the information returned is fresh, straight from the target’s word processing system.”

The impact of these facts and the way we think about our national security is significant. Physical security can be passed and we have to devise other ways to protect our effectiveness.

One other traditional aspect of sovereignty that is fading away is the power to issue currency and to control its value. From the very earliest times, governments have wished to monopolize this powerful medium and to control its value in the world markets. Until recently government retained a substantial power to manipulate the value of their currencies.

But as the information revolution has rendered borders porous to huge volumes of high speed information, the task has become difficult if not impossible. The control of currency has always given a government great leverage over the most crucial material endeavor of its citizens. The regulation of money markets is the regulation of society’s resources in their most fungible and convenient form.

The new Clinton Administration is already starting to fire warning shots across the bow of the Federal Reserve. But they will find that, until recently, what we call money, be it a piece of paper or a bookkeeping entry or a physical object, it has been linked to a physical commodity which has put some limit on a sovereign’s ability to inflate their currency.

The nature of the commodity that was chosen has varied with the interest of the people using it. American colonists used tobacco money. American Indians favored the cowrie shell or “wampum” and, of course, the more familiar gold and silver is still circulating.

But the link between commodities and money became slowly attenuated over time. On March 6, 1933, President Roosevelt issued a proclamation prohibiting Americans from holding gold. The Congress followed on June 5th , passed a joint resolution repudiating the gold clause in their own bonds. While various other actions were taken to weaken the tide of gold, the final blow was administered on August 15th 1971, when President Nixon terminated the convertibility of the dollar into gold and the era of floating began.

In today’s world, the Administration will find that the value of a currency is determined by the price that the marketplace will pay for it in exchange for some other currency. Indeed the market is no longer even a geographic place or a location. Instead, it’s more than 200,000 computer screens in hundreds of trading rooms in dozens of countries all over the world, all tied together by an electronic infrastructure. The latest political joke, newly released GDP figures, or the statement of some world leaders appear instantly on all of the screens at the same time and the traders vote, if you will, on their view of that action by buying or selling.

This market is a harsh disciplinarian. When Francois Mitterand, for example, became President of France in 1981, he was a committed Socialist. And almost immediately, actually within the week, money began to flow out of the country. Foreign exchange reserves were depleted in 30 days, and within six months, Mitterand had to reverse course and become pro-capitalist.

Now this is not to say that governments can no longer influence the value of their currencies. They can and do. But their ability and those of their central banks to readily manipulate [it] in world markets is declining. Increasingly, I think you will find that currency values will be experiencing less as a power and a privilege of the government than as a discipline on the economic and political imprudence of sovereigns.

This new discipline is being administered by a completely new system. Unlike all prior systems, this was not built by politicians, economists, central bankers, finance ministers. No new John Maynard Keynes stepped forward with a global solution. There was no high level conference and no master plan. The new system was built by technology.

The system is partly an accidental by-product of communication satellites and engineers learning how to use the electro-magnetic spectrum up to 500 gigahertz. The convergence of computers and telecommunications has created this new system, and even a new monetary standard by which the value of currencies is determined.

The information standard has replaced the gold standard. We sit at home and we watch a live broadcasts of riots in a country on the other side of the world, and the currency falls in minutes. We hear, by satellite, that a leadership crisis is resolved, and the currency rises. Ten minutes, for example, after the news of Chernobyl was received, market data in every market in the world showed that the stocks of agricultural companies began to increase in value.

For the first time in history countless investors, merchants, citizens can know almost instantly of the breaking news all over the earth. And depending on how they interpret these events, their desire to hold your currency or to sell it, will be inescapably translated into the rise or fall of our exchange rate. The natural first response to this claim is: it’s always been that way. The pressure of events have always been a major factor in determining the value of currencies.

But the speed and the volume of the global market makes it different in kind and not in degree. Cherished political, regulatory and economic levers routinely used by sovereigns in the past have lost much of their power because the new information standard is not subject to political tinkering.

It used to be that the political and economic foibles played to a local audience, and their results could often be contained. A relatively small group of central bankers and politicians representing their sovereign governments believed it could control the value of a currency. This is no longer true.

The global market makes and publishes judgments about currencies in the world every minute of every day. The forces are so powerful that government intervention only results in expensive failure over time.

Governments do not welcome this information standard anymore than absolute monarchs embraced universal suffrage. Politicians who wish to evade the responsibility for their imprudent fiscal and monetary policies perceive correctly that the information standard will punish them.

Moreover, in stark contrast to prior monetary systems, there is no way for a sovereign to resign from the information standard. Like many administrations before it, the Clinton team displays a wide spectrum of economic philosophy. The new Secretary of the Treasury was, at one time, a strong supporter of supply-side economics, largely responsible for getting the tax cuts through. While the designated Chairperson of the Council on Economic Advisors believed that there is no relationship between the taxes a nation pays and its economic performance.

And to complete the confusion, the new head of the OMB, a former congressman, is distressed, I read, to learn the deficit was bigger than he had previously thought. It was a performance reminiscent, at least to me, of that Inspector Lewis Renault in I who was shocked to learn that gambling took place in Rick’s Casino. [laughter]

It will be interesting to see how the market sorts all of this out. But whatever politicians do or say, the screens will continue to light up and traders will trade, and the currency values will continue to be set, not by sovereign governments, but by a global plebiscite on their actions.

This new global market is not limited to trade and financial instruments. Indeed, I would argue strongly that the world cannot be understood any longer as a collection of national economies. The electronic infrastructure that now ties us together, as well as the great advances in the efficiency of conventional transportation, have created a single global market.

The new Administration will learn despite the wails of special interests that the very phrase “international trade” has begun to sound obsolete. It can be argued, and I think successfully, that the concept of trade balance is an artifact of the past. As long as capital, both human and money, can move toward opportunity, trade will never balance.

Indeed, one has as little reason to desire such accounting symmetry between nations as between California and New York. Commerce and production are increasingly trans-national. More and more products have value added in several different countries. The dress that a customer purchases at a smart store in San Francisco may have originated with a cloth woven in Korea, finished in Taiwan, cut and sewed in India according to an American pattern, and of course, a stop in Milan to pick up the “Made in Italy” label, and leave off the substantial licensing fee.

Former Secretary of State George Schulz recently remarked that a few months ago, “I saw a snapshot of a shipping label of an integrated circuit produced by an American firm. It said, and I quote, ‘Made in one or more of the following countries. Korea, Hong Kong, Malaysia, Singapore, Taiwan, Mauritius, Thailand, Indonesia and Mexico. The exact country of origin is unknown.’” [laughter]

That label, he said, says a lot about where we are moving. Whatever the correct word for this phenomenon is, trade certainly seems to be inadequate. How does one account for the current trade products, trade figures when the exact country of origin is unknown? How are national governments to regulate the complexities of trans-national production with anything like the precision and the firmness they once regulated trade? How are politicians to whip up nationalistic fever against foreign goods when American car companies build cars in Mexico or export to Africa and pay the profits to pensioners in Chicago? And the Japanese build cars in Tennessee or export to Europe and use the income to buy real estate in Texas.

Nevertheless, if the new interventionists get their way, they could cripple the global economy. The new President will find that many of the terms that we use today to describe our economy no longer reflect reality at all.

For example, everybody in the room knows that all the lights would go out, all the airplanes would be grounded, and all the financial institutions and most of the factories of the world would shut down, if the computer software that runs their systems were to disappear. Yet these crucial intellectual assets do not appear in any substantial way on any balance sheets of the world.

These balance sheets, instead, are full of what the industrial age call tangible assets. Buildings, machinery, things you can touch and feel and that are hard; but things that only can be seen. How does a national government measure intellectual capital formation when much of it cannot be counted on your fingers? How do they measure the productivity of knowledge workers whose product cannot be quantified as easily? And if it cannot measure that productivity, how does it track and control the money supply when financial markets create new instruments faster than the regulators can keep track of them? And if it can’t do any of these things with a relative precision of simpler days, what becomes of the great mission of modern government controlling and manipulating the national economy? Even if some of these measuring problems are solved, and they surely will be, the phenomenon they measure will be far more complex and more difficult to manipulate than the industrial age of old.

These remarks today have not dwelt on the wonders of the “gee whiz” technology emerging from your Silicon Valley, not because they’re not wondrous—they are—but because revolutions are not made by gadgets. But they are made by shifts in the balance of power. The technology is only the enabling factor, not the cause.

When a system of national currency is run by central banks is transformed into a global marketplace driven by private currency traders, power changes hands. When a system of national economy is linked by government, regulated trade is replaced, at least in part, by an increasingly integrated trans-national system beyond the reach of any one country, power changes hands. When an international telecommunication systems incorporating technologies, from mobile phones to satellites, deprives government of the ability to keep secrets from the world and from their people, power changes hands. When a microchip the size of your thumbnail can turn a relatively simple, inexpensive weapon into a Stinger missile, which enables an illiterate tribesman to destroy a multimillion-dollar armored helicopter and its highly trained crew, power changes hands. And when the President of the United States picks up the phone to talk to another head of state, rather than have an ambassador deliver a carefully crafted diplomatic note to the foreign ministry, power changes hands.

Now, none of this is to say that sovereign power will disappear. It will not. But what it does mean is that no government over time can act alone not subject to contradiction. The protesters in Prague were right. The world is watching, and the power of world opinion is transmitted and focused and reported by the network. The world looks and reacts and it brings pressure on everything from the destruction of the rainforest, the allegation of global warming, the disposal of toxic waste, and the violation of human rights anywhere in the world.

I would say that all of this is good news for freedom. Ronald Reagan’s powerful speech on May 31st, 1988, delivered at Moscow State University, was heard around the world. He spoke of the power of freedom in a land that had seen little of it. He spoke of economic freedom to release the innovation of the entrepreneur. He spoke of the information revolution, and in his words, “quietly sweeping the globe without bloodshed or conflict.” Few realized at the time that this message, carried on the global network, was working on the hearts and minds of the people. [break in tape]—process. A shaking and remaking our world. All of these forces profoundly affect the way the new administration has to go about it’s business because they affect the foundations of our modern society and our international relations.

The President said, “the urgent question of our age is whether we can make change our friend and not our enemy.” Americans, I would argue, handle change better than most of the world’s people. We know that new circumstances require new solutions. But diplomats and politicians, like old soldiers, often concentrate on fighting the last war and not the new one.

But whatever the new policies, the screens are going to continue to light up all over the world. Judgments will be made instantly and reflected in our markets. There is no longer anyplace for a government to hide. Thank you very much. [applause]

David Theroux

Are there any questions? Sir?

Question #1

(inaudible question)

Walter B. Wriston

Well, it’s one of the problems that is one of the biggest ones that we face. The transition from manual workers into knowledge workers which means the importance of our educational system will get even more than it is today. In the agricultural revolution, where 18 million people left the family farm in America, they went to non-intellectual tasks on the assembly line basically. Today, we’re going to have retraining programs using it.

I think the greatest example of how this can be done in a sense is General Electric Company has a program called “Workout,” in which they learn the oldest lesson in the world: that the person who does the job, knows how to do it better than anybody else. And as one of their workers told me in the factory the other day, he said, “they hired my body for 30 years now they got my mind, too.” And you’re seeing this spread across our country. But there’s going to be a group that will not make that transition, and that’s where the safety net is going to happen. But I believe it’s an irreversible process. Sir?

Question #2

What do you think of this promise that you will only increase the (inaudible) Do you think we (inaudible) or do you see an increase for everybody.

Walter B. Wriston

I also believe in Santa Claus. [laughter] There’s no way. Yes, sir?

Question #3

(inaudible question) What do you see the coming role (inaudible)?

Walter B. Wriston

I think the commercial banking business is also in the midst of a very traumatic transition. We probably have at least twice as many banks as we need in the United States. If you look at Canada, they’ve got six or seven. Germany’s got five or six. Japan’s got about the same.

What happened to us is that when the wagon trains went West, every time they stopped, a guy got off and opened a saloon, a general store, and a bank. And in 1929, we had 30,000 banks. And when I came into business you used to have a little book that told you what to pay for a dollar bill issued by a bank in Painted Post, Montana, and you hoped that you could collect it. Get it there before the bank failed, which was not always possible. Now we’re down to whatever it is, 11,000 to 12,000 banks. And the government has so hamstrung the banks that their future is going to have to be fought for. They’ve lost the business of all big corporations, because the information society has given the Treasurer of General Motors as much information about the credit of DuPont as the banks have, so the commercial paper market now exceeds the commercial loans of all banks in New York put together. That’s never coming back.

The second area where banks used to do business was inventory finance. Today, you have direct computer hookups between WalMart and Procter & Gamble. There are no more warehouses. There are no more inventory financing. So that thing is going.

Then they went in [to] the consumer business, and the credit cards and so forth, and now we have General Electric, General Motors, Sears Roebuck, everybody you can name, in the credit card business. They have no capital ratios. They have no bank inspectors talking about their write-offs. They just do the business.

So we’re under siege in the banking community, and unless they change some of those things, the market share of banks will continue to erode. But the citizen will be served because the way markets operate when government blocks out a needed service, somebody else arises to do it. So that, but it’s a crucial time to take a look at what has been done to the system in the last few years.

David Theroux

One more question.

Question #4

(inaudible question) gold standard (inaudible).

Walter B. Wriston

No. The reason for it is that the automaticity of the gold standard or the gold-exchange standard, as you know, worked that when you ran a balance of trade surplus, if that means anything anymore, or a deficit, you paid for that by shipping gold. And when you shipped gold, the money stock shrank, and as it shrank, a depression was created. I don’t know any elected government that could permit that to happen. So while the technicians can argue about it, I wouldn’t hang by my thumbs waiting for a decision to reinstate it. Thank you very much for your attention. [applause]

David Theroux

Thank you very much, Walter, sincerely. And thank you for joining with us, ladies and gentlemen. Those of you who would be interested in getting a copy of Walter’s book, there are copies in the front and I highly recommend it. I think his talk is a small indication of how wonderful his book is. He also has a few minutes if anyone is interested in getting an autographed copy; then he has to run off to a board meeting. So thank you, again, and I look forward to seeing you at a future Institute program if possible. Thank you.


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