The vitality of Western economies is based, in important ways, on the health of our credit system. This system depends on the actual financial strength of large Western banks, on the financial and fiscal policies of Western governments, as well as on public psychology. Today, for a variety of reasons, we are witnessing a loss of confidence in our banking system which, if allowed to continue, could have serious repercussions.
The word “credit” derives from the Latin credere: to believe. Prudence on the part of lenders and borrowers has to be supported by the general belief on the part of consumers and depositors that the system will work. Today, this belief has become perilously fragile. It is not fragile, as some bankers may believe, because “there is too much loose talk about the problem.” By now, every responsible businessman should know that the word “crisis” is newsworthy and that press and TV reporting make it utterly impossible to avoid serious questions about the banking system, even if it were desirable to do so. Furthermore, it is undeniable that both the known facts and the potential problems argue against a policy of hoping to muddle through with a little bit of luck. The risk of inaction is simply too great.
During the last decade, major changes have occurred in the organization and functioning of Western economies, world trade, and the distribution of wealth among nations. All of these changes, in one form or another, are causes for the enormous pressures that weigh on our banking system.
The first of these causes lies in the international economy. The world today appears to have entered a deflationary cycle. For the first time since World War II every industrially developed country is in various stages of recession. Unemployment levels are rising and inflation rates are coming down. Real interest rates are still prohibitively high and financial pressures are causing cutbacks in industry and government. In the US, the fight against inflation appears to be successful; we may, however, find that success carries a heavy price. The impact of US deflation on the rest of the world is staggering: recession, unemployment, and collapsing raw material prices are a worldwide phenomenon. There can be no worldwide recovery without a US recovery; the US has to be the locomotive.
Second, the demise, in 1971, of the arrangements made at Bretton Woods in 1945 caused the breakdown of an international monetary system which made the years between 1945 and 1971 among the most successful in the history of monetary management. Indeed for all countries, rich and poor, this was the most fruitful period in the history of the world. Harold Lever, who has one of the most brilliant financial minds in England, said in December 1981: “Bretton Woods was itself the greatest single achievement in terms of creating an institution which would bridge the growing interdependence of the world and national decisions.” The effect of the Bretton Woods agreements was to make the dollar the world’s reserve …