All Commentary
Monday, April 1, 1996

The Vandals’ Crown: How Rebel Currency Traders Overthrew the World’s Central Banks

Market Checks and Balances Limit Widespread Corruption

The first 225 pages of The Vandals’ Crown generally make for interesting reading—describing some fascinating developments in financial markets and the economy. The remaining 50 or so pages unfortunately skew off in a different direction—either better left for another book or simply discarded altogether. Much of this book, though, lives up to its tantalizing subtitle—“How Rebel Currency Traders Overthrew the World’s Central Banks.”

Author Gregory J. Millman explores various intriguing moments in monetary history. He writes of France’s great inflation between 1418 and 1423 and takes note of John Locke’s contribution to monetary thought. He also offers a brief discussion of the gold standard, pointing out that one of the great merits of gold is its ability to restrain the activities of monetary authorities. After all, inflation results from government’s mismanagement of monetary policy. Indeed, the author clearly shows that even gold-based monetary systems go awry when government officials tinker with and try to circumvent the system’s disciplines. Among the examples of government mischief he cites are the trade war and currency devaluations of the Great Depression, and the inflationary U.S. monetary policy that eventually destroyed the flawed Bretton Woods monetary regime.

As the U.S. dollar was de-linked from gold—effectively in the late 1960s and officially in 1971—a new source for monetary discipline had to be found. This is where The Vandals’ Crown shines. Millman tells the story of how currency markets developed and grew, and eventually how more powerful, efficient, and integrated financial markets now work to impose some checks and balances on both government fiscal and monetary policies.

Millman sets the tone for this story early on by noting: “Although investors have always had to take into consideration the quality of a government’s management of its economy, traders now have an unprecedented degree of power to sweep the financial foundation out from under poorly managed, politically unstable, or uneconomic governments before the bureaucrats even know what has happened.” He continues: “For better or worse, since the collapse of the Bretton Woods international monetary order, traders provide the only financial discipline the world knows.”

The reader might expect the author to wrap up such a book perhaps with an analysis of how the economy performs under today’s intertwined monetary, fiscal, and financial systems. However, Millman concludes this book with a look at a host of legal infractions and shady schemes concocted by various financial traders over the past few years. Millman sought to show “the weaknesses of a financial system that is more efficient than any financial system in history, but may also be more vulnerable to moral hazard than ever before.” The Vandals’ Crown tarnishes in these last pages.

After showing the shortcomings (namely, inflation) of monetary policy under the discretion of government bureaucrats, Millman seemed compelled to attack the individuals operating in the financial markets as well. Human nature is human nature, but the author offers no comprehensive and compelling arguments as to why more efficient financial markets might be more “vulnerable to moral hazard.” His substantial emphasis in the closing pages on the wrongdoings of a handful of players in the financial markets also gives the mistaken impression that corruption is widespread and such individuals possess the capabilities to wreak catastrophic economic havoc.

Markets ensure that individuals rarely, if ever, possess such power. The competitive marketplace possesses real checks and balances, which make widespread corruption impossible. After offering an often eloquent explanation as to how markets can act as a disciplining force on government, Millman should understand that markets, operating within a sound system of property rights, discipline themselves.

In the end, the ability of the government to do substantial economic evil far outstrips that of the individual. Even with the checks provided by financial markets, as explained in The Vandals’ Crown, government misdeeds continue, with markets, the economy, and individuals paying the price. This should have been Mr. Millman’s closing caveat.