There seems to be an assumption, throughout most of the discus- sion of international governance issues, that the development of increas- ingly powerful institutions at the interna- tional level is going to be limited by the difficulties they experience securing dem- ocratic legitimacy. Most often, this assumption shows up in the view that real political power is going to remain confined to the state level for the foresee- able future because of the insurmountable ”œdemocracy deficit” that appears once the political community expands beyond this scale (witness the people throwing rocks at their own democratically elected repre- sentatives, whenever the latter choose to attend a meeting under the auspices of the World Trade Organization).

What seems odd to me about this assumption is that it is strikingly at variance with what we know about the growth of state power at the national level. There the gradual accretion of authority and jurisdiction was driven primarily by the demand for adminis- trative power, as a way of resolving col- lective action problems. Democratic accountability came afterward, as a rearguard action designed to protect civil society from the potential misuse of these expanded powers.

Why should things be any different at the international level? After all, the problems of globalization are essentially just the problems of 19th century capi- talism reappearing on a larger scale. The unregulated capitalism of the 19th cen- tury was plagued by multiple forms of market failure. The welfare state arose in the 20th century essentially as a way of plugging these gaps. Now that market exchange has become more internation- al, the same gaps are starting to show up again on the world stage. Since the problems are the same, what reason is there to think that the solutions will be any different?

Take the case of currency instability. Critics of globalization point to the Mexican peso crisis of 1994 or the run on the Thai bhat in 1997 as evidence that the world trade system is nothing but a Trojan horse for the imposition of structural adjustment policies by the International Monetary Fund. But currency instability has an illustrious history that long pre- dates either the IMF or the ”œWashington consensus.” It was actually a hallmark fea- ture of 19th century capitalism.

Back then, in the United States for instance, banks used to issue their own paper money. Thus there were mul- tiple competing currencies, each backed by the assets of private banks (much as today, on the international level, there are multiple competing currencies, each backed by a different nation-state). Whenever there was a run on a bank, or even the rumour of a run on a bank, any- one holding that currency would want to dispose of it as quickly as possible. The result would be a sudden and catastroph- ic devaluation of those banknotes.

How was this problem solved? By central banking on the national level, and in particular, by having the state exercise an effective monopoly in the market for fiat currency. This exercise of state power eliminated the problem so completely on the domestic level that most people have forgotten that money risk ever existed (and no longer think of central banking as a welfare-state social program). As a result, international cur- rency crises are regarded as some new and unexpected consequence of global- ized capitalism, rather than an elemen- tary defect in the structure of unregulated capitalism, one that can be easily resolved through an exercise of adminis- trative power.

This is not to suggest that a single world currency represents the solution to the problem of monetary instability. That would be undesirable and unwork- able on many levels. What it does sug- gest, however, is that the problem of instability is going to be addressed through the development of increasing- ly powerful international financial insti- tutions, with the ability to impose their will in a more binding fashion both upon governments and private parties, whether we like it or not. Nothing else has ever worked at the national level, so why should we expect anything differ- ent at the international level?

Will these increasingly powerful financial institutions be demo- cratically accountable? There is no reason to expect so. They are not really under democratic control at the national level either. This is why the development of central banking domestically was fought tooth and nail by populists, who found the arms-length relationship between the legislature and the central bank unac- ceptable. (This was a core issue in Cana- da, from the social credit movement through to the early Reform Party).

Of course, there are very good rea- sons why we do not want central banks to be under direct democratic control. First and foremost, we must protect the expertise of bankers from the tendency of democratic majorities to choose the ministrations of the pastry chef over those of the doctor (to use Plato’s anal- ogy). The existence of a central bank is a consequence of a demand for binding administrative power, not a conduit for the expression of our democratic will.

This is not to suggest that democrat- ic controls on these institutions are unde- sirable. It just means that, when it comes to their development and the expansion of their powers, democracy has not been, nor will it be, in the driver’s seat.

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