Applause From An Old Man

     Once in a great while, an essay comes my way that leaves me speechless from its insight. I’ve just received such an essay from Haretina Kukuri. It’s so penetrating that all I can do is applaud.

     Haretina brilliantly traces the lineaments of the world order from the days when what mattered above all else was force and geographic hegemony, to today, when finance matters as much as arms and armies.

     Within the aggregate of maneuvers and operations we call “finance,” there is always a foundation stone. When the currencies of great nations were redeemable in specie, that stone was gold. But the wars of the Nightmare Century gave the great powers the opportunity they sought to forsake specie redeemability. But a foundation stone was still required. The Bretton Woods system implied it; Haretina makes it visible:

     The order that resulted rested on a distinctive synthesis: American predominance supplied the material foundation; multilateral institutions supplied procedural legitimacy. Together they produced stability and integration without precedent — trade expanded dramatically, investment accelerated, Western Europe and Japan rebuilt into industrial prosperity. But the system’s true foundation was neither treaty nor institution.
     It was confidence: confidence that obligations would be honoured, currencies would hold, rules would bind, and institutions would function under strain. Trust was the invisible infrastructure. Central banks accumulated dollars because American markets combined depth, liquidity and legal certainty no competitor could match; investors accepted modest Treasury yields because institutional credibility reduced uncertainty more effectively than higher returns elsewhere.

     Once again, hearken to the great Benjamin M. Anderson:

     There is no need in human life so great as that men should trust one another and should trust their government, should believe in promises, and should keep promises in order that future promises may be believed in and in order that confident cooperation may be possible. Good faith -- personal, national, and international -- is the first prerequisite of decent living, of the steady going on of industry, of governmental financial strength, and of international peace. -- Benjamin M. Anderson, Economics and the Public Welfare: A Financial and Economic History of the United States, 1914 -- 1946

     Gold maintained a shadow presence in international finance even after the Bretton Woods agreement. But in truth, what mattered above all was the other parties’ confidence in American financial strength and the trustworthiness of American traders and markets. That confidence has waned somewhat this past half-century, though not to the point of revoking the dollar’s status as the world’s “reserve currency.”

     In her conclusion, Haretina tacitly invokes one of the key insights of cybernetic analysis, The Law of Requisite Variety:

     The Law of Requisite Variety (coined by cybernetician W. Ross Ashby) states that to successfully control or adapt to a complex system, the internal complexity and behavioral flexibility of the controller must be equal to or greater than the complexity of the environment it faces.
     Also known as "variety absorbs variety", this First Law of Cybernetics essentially means that the entity with the most available options, responses, and adaptable behaviors will dictate the system's outcome. If an environment throws a highly unpredictable set of challenges at you, a rigid, inflexible set of responses will eventually fail.

     In Haretina’s words:

     The four-phase framework proposed here is not a rigid periodisation but a way of seeing a single transformation whole. Across two centuries the instruments changed relentlessly — sovereign loans became development finance, banking missions became multilateral institutions, fixed parities dissolved into integrated capital markets, and competition now runs through payment systems, reserve currencies, digital infrastructure, artificial intelligence, critical minerals and regulatory authority. The continuity lies beneath: states converting financial capability into political influence while economising on coercion.
     Military power remains indispensable, and negotiation remains essential. But neither now determines the structure of international order by itself. Order increasingly depends on who designs the institutions through which capital moves, liquidity is created, payments settle, technology is financed and confidence is sustained.
     The next chapter of international politics will not be written primarily through territorial conquest or ideological confrontation.
     It will be written through competing financial architectures.
     The decisive question is no longer who possesses the greatest wealth.
     It is who organises the networks through which the world’s wealth circulates.
     That is the diplomacy of finance.

     I told you to keep an eye on this young woman. She’s going places.