The Confidence Game.

In the summer of 1993, I found myself at a cocktail party on the island republic of Jamaica. Among the other guests was a young man who had just left a job at the Ministry of Finance. I asked him about a story in that morning's Gleaner (Jamaica's newspaper of record) which reported that the Bank of Jamaica was considering taking a $24 million loan from the World Bank to defend the declining Jamaican dollar on the foreign exchange markets.

Before he could answer, I blurted out, "Are you people crazy? Do you know how long $24 million will last on the computer screen of some 20-year-old foreign exchange trader in New York? About 10 seconds! You'd be better off borrowing the money and giving $5 to every inhabitant of this island!"

I still think this was sound, if impolitely delivered, advice. The question it addresses--who controls the world's currencies?--is the subject of two excellent, readable, and wide-ranging books about the brave new world of globalized finance.

The first, by Steven Solomon, concerns itself with the central bankers. He begins with what Hollywood script people call "the inciting incident"--namely, the October 1987 market crash--and then he circles back through history. His focus, though, is what might be called finance's postmodern era, the origin of which must surely be dated back to August 1971, when Richard Nixon took the dollar off the gold standard. The book is engrossing; Solomon's research is meticulous and he presents his case gracefully.

The second work, by Gregory Millman, looks at the currency speculators. Admittedly journalistic and anecdotal, The Vandals' Crown spends much of its time on the personalities behind the new trading strategies and financial instruments that have radically accelerated the rate at which capital can be deployed. Millman takes the reader a very long way toward knowing how a handful of anonymous currency speculators can, in an instant, wreak havoc on international finance. This is a fine book as well, and a splendid complement to Solomon.

So complementary are the two books, in fact, that the provocative subtitles on their jackets pose a contradiction. "How Rebel Currency Traders Overthrew the World's Central Banks" trumpets the cover of The Vandals' Crown. The Confidence Game, meanwhile, placards, "How Unelected Central Bankers Are Governing the Changed World Economy." If the central bankers have indeed been overthrown, as per Millman, how can they be governing the world economy, as per Solomon?

The fact is, the central banks today are neither governing nor lying dead on the battlefield. They are merely struggling with forces often beyond their comprehension and control.

For most of this century, from the founding of the Federal Reserve Bank in 1913 until about 10 years ago, the central banks exerted their hegemony because, simply, they had more money. The kinds of massive speculative attacks we have seen in recent years on the pound, the lira, the franc, the peso, and--for the last few months--the dollar, succeed only when the private sector, with no loyalty other than to its purse, has more resources than the central banks at its disposal. At that point, selling power simply overwhelms buying power. Large pools of available capital, the ego and greed of financiers, and the public's notorious, exploitable lack of concern and understanding of high finance (public and private) add up to a potent recipe.

If I were made of sterner stuff, I would take Solomon and Millman to task for giving us more history than we need to know as we confront the present. What we need to know is the following: Beginning in the seventies, huge pools of dollars came into being over whose creation the Federal Reserve chose to exercise no control. The proximate cause was OPEC's sextupling of the price of oil. But the principal culprits were the American banks, led by Citicorp's Walter Wriston, whose doctrine of "petrodollar recycling" has, I sincerely believe, brought misery to more people around the world than anything perpetrated by Stalin, Mao, or Hitler. When OPEC insisted that oil transactions continue to be settled in dollars, most OPEC customers, like Jamaica, had no internal means of generating enough dollars to meet the price increase. The United States should at this point have told OPEC, in effect (by jawboning our large banks), to accept payment in local currencies and either take its chances in the foreign exchange markets or reinvest those receipts in the country of origin. Instead, they came up with "recycling": Citibank would lend Jamaica the U.S. dollars to pay its OPEC bill, OPEC would deposit those dollars in Citibank, Citibank would lend more dollars to Jamaica, now to pay not only for oil but also for interest on the prior loan, and so on, and so on to the inevitable ends of destitution and default. U.S. banks, chasing paper profits to drive up the price of their shares, went wild overseas, lending as they pleased without being limited (as they were in domestically transacted business) by Federal Reserve regulations.

The banks' motivation was to create large paper and cash profits in loan-origination and servicing fees as well as interest. They side-stepped the real point of lending, which is to get your depositors' money back, and yielded to the seemingly uncontrollable compulsion of financiers to be at the heart of the action, whatever that action is. Best of all, these recycling loans could be made offshore, through subsidiary banks in countries well beyond the Fed's reach. These loans in effect minted new U.S. dollars without the Fed's by-your-leave. By the end of the seventies, no one--including the Fed--could say within $350 billion how many of these offshore dollars were out there.

At the conclusions of their books, Solomon and Millman both seem shaken by their journey. Here is Solomon: "The uncontrolled, high-speed gyrations of stateless money unhinged from economic fundamentals or national economic policies has transformed the international monetary system ... into a fully-floating, private non-system driven by the roller-coaster shifts in focus and manias of the collective herd of global financial investors."

Can anything be done? And if so, who should do it? One answer may be for the central banks to do nothing. If a central bank is unwilling to dissipate its reserves in defense of its currency, as the United Kingdom, France, and Mexico did to notorious result, the rough market tides will soon level off. Sellers, whether long or short, need buyers.

Financial technology and a world-wide flight from industrial investment have allowed the capital markets to capture the lion's share of world liquidity. We have to understand that we are living in a world as different from the one in which Bretton Woods was convened as the Copernican galaxy was from the Ptolemaic. It may be that the great truth of finance and investment abides: namely, that all things in time regress to the mean. But the path by which that regression is reached will change regularly. New road maps are constantly needed.

In other words, to know where to begin, we need to know more about where we are. Books such as The Vandals' Crown and The Confidence Game are extremely useful in helping intelligent lay people begin to find their way in a maze kept tortuous by those who most profit from its complexity.

Until we have absorbed these lessons, though, perhaps the best we can do in our own interest is to ask our great men, beginning with the present chairman of the Federal Reserve Bank, to desist from showing us how clever or determined they are, to stand aside and let the market sort out its mischief all by itself, without the intervention of the heavy, foolish, and far from invisible hand of government.