Wednesday, August 17, 2011

Trust as social capital in international affairs

The downgrading of U.S. federal debt from AAA to AA+ is a statement by Standard and Poor's that investors should trust the United States Government to honor that debt less than they did previously.

Money is always based on trust. In ancient history when people used silver and gold coins, they did so trusting that they could exchange those coins for something of comparable value to what they themselves had traded to obtain them. When the United States federal government began to issue paper money, they did so as treasury notes under the fiction that they could be redeemed for metal coins. These days U.S. paper money is simply paper, not backed by gold nor silver, and depends on the trust of people that it will buy roughly as much tomorrow as it does today.  I lived in Chile while it was experiencing very high rates of inflation, and I can testify that when people lose that faith in their currency, life becomes more difficult.

The United States issued silver certificates, bills which were to be redeemable in silver, until 1964 (and they could only be redeemed for federal reserve notes since 1968). When President Nixon took the United States off of the gold standard in 1971, that is when the United States stopped offering to exchange its money for gold, the Bretton Woods system of international financial exchange had to be rebuilt. The result has been called the "Nixon Shock". This was a much more severe blow to international trust in the ability and willingness of the United States Government to honor its financial commitments.

Treaties are of value only when there is trust that they will honored. Mutual security treaties, such as that implemented by the North Atlantic Treaty Organization (NATO) are perhaps the best known, but there are many other treaties that are important to the United States, providing protection to U.S. citizens abroad and to our international commerce and interests. The Constitution has the Executive Branch of the Government negotiate treaties, but requires that they be ratified by the Congress. The Senate has failed to ratify 21 treaties. Think of the treaty establishing the League of Nations which the Senate refused to ratify without a reservation; the President refused to sign the law putting the treaty into effect with that reservation. Given the key role of President Wilson played in the negotiation of that treaty, what must that failure have done to the trust placed by our allies in the negotiating positions of the Government.

Source of illustration

Note too that the United States Government has unilaterally broken treaties, often with Indian nations but also with foreign nations. Again, this is a history which reduces trust in the willingness of the government to honor its obligations.

We think of trust as critical to social capital. In an environment in which people trust each other and their institutions institutions can work well. Building that trust takes time and effort and thus is counted as social capital. Without such trust, even the most elegantly conceived institutions are not likely to work well.

I suggest that comparably belief of national leaders in the trustworthiness of other nations is the glue that makes international institutions work. When the United States works hard to promote the creation of UNESCO, modeling its constitution to meet U.S. interests, and then withdraws from the Organization leaving it to deal with an immense budget shock, the behavior does not encourage other nations to trust our support for international institutions.

At the end of World War II the United States enjoyed great trust from our allies, a trust that I think continued strong through the Eisenhower administration. The Kennedy administration seems to me to have worked to promote and sustain that trust. Since then, American wars and other aspects of foreign policy have resulted in a reduction of trust by our allies. Our recent financial policies have similarly eroded trust.

It is not clear to me how much the lack of trust in the United States is likely to cost in money and in security, but I wish we would invest more in building and keeping that trust.

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