The international financial crisis that began in Mexico in 1994-95 and more recently struck Southeast Asia, Russia, and Brazil has raised serious questions about the viability of the global monetary order. That is why Treasury Secretary Robert Rubin and others have called for a new "global financial architecture." The fundamental issue, of course, is whether the government or the market should be at the center of the new monetary universe.
The problem with the current system is that it is really a pseudo-system--a compromised system influenced more by political considerations than by the principles of private property and individual freedom. That is why we still have pegged exchange rates, discretionary government fiat monies, crony capitalism, and negotiated rather than free trade.
It's not market failure that has led to the chaos in global financial markets but government failure. In particular, governments have failed to get out of the way and let a spontaneous market order evolve while providing the institutional infrastructure needed by free markets and free people.
The basic question is, Will governments leave markets alone and focus on establishing a legal framework for free trade, free capital flows, and sound money, or will they be led by the so-called best and brightest to create institutions that enhance the discretion and power of the state?
The debate over a new global financial architecture is, at heart, a debate over the role of government in a free society.
The temptation is to think that we can improve upon the spontaneous or undesigned order of the free market by deliberately designing a new global financial architecture. The problem is that, when government planners and bureaucrats are doing the designing, the incentive is to have too much government discretion and too little market discipline.
Thus, the debate over a new global financial architecture is, at heart, a debate over the role of government in a free society. The overriding principle of freedom should not be compromised by limiting the choice of monetary institutions to a little more or a little less government discretion. Rather, the choice should be between government fiat money systems, on the one hand, and free-market monetary systems, on the other.
Much has been written about the International Monetary Fund bailouts and the problem of moral hazard, but we should not forget that the moral hazard problem is only one aspect of the difficulties facing the current international financial system.
Pegged exchange rates and discretionary government fiat monies are the underlying sources of instability in the global monetary order. With either rigidly fixed or freely floating exchange rates and a rules-based monetary system, there would be no serious adjustment problem for the balance of payments and, hence, no major problems of liquidity or confidence. In such a world, of course, there would be no role for the IMF.
The point is, with a money of stable value and with prices set in the free market, adjustments would take place more smoothly--and errors would be corrected more quickly--than under the current hybrid system.
The failure of central planning means that the relevant choice for the new millennium is between market liberalism--a system in which individual liberty predominates--and market socialism (the so-called mixed economy or Third Way) in which the state plans the market and compromises individual freedom and responsibility. As Russian economist Larisa Piyasheva said when discussing the former Soviet Union as it began its transition from plan to market, "You can't be half pregnant." The setbacks in Russia and Asia have been caused not by an excess of capitalism and freedom but by an excess of government and planning. Thus, the consequences of the choice between true and false markets should be clear.
These broader philosophical issues should not be lost sight of in the debate over the specifics of a new global financial architecture.