Walter Wriston (b. 1919, d. 2005) was a distinguished banker for most of his life.  He headed up Citibank/Citicorp from 1967 until 1984.  He chaired the Economic Policy Advisory Board from 1982 to 1989 and was reportedly offered the post of Secretary of the Treasury twice, but turned it down.  He was also an Eagle Scout and received the Presidential Medal of Freedom, but that’s not really relevant.

Wriston was also something of a visionary about how the information revolution would change the world of business.  He started offering MasterCard to his customers in 1969, ultimately mailing out 20 million cards to consumers and losing $1 billion before the program generated a profit.

The trouble with MasterCard was that the usury laws in New York restricted the amount of interest Citi could charge its users, which meant that the double-digit inflation of the 1970s kept eating up the profits.

And here’s where his insight into info tech served him well.  He saw that electronic fund transfers gave capital–both monetary and intellectual–the freedom to flow wherever it wanted.  He even created a nice rule, which has now become known as Wriston’s Law.

It says: “Capital will flow where it is wanted and stay where it is well treated.”

The practical application of Wriston’s Law (although Wriston was too self-effacing to call it that himself) was that he moved Citi’s credit card operations to South Dakota, which didn’t have a usury law.  Many people think that this decision saved Citi.

Under Wriston’s leadership, Citicorp’s profit mushroomed from $145 million in 1970 to $890 million in 1984.

The application of Wriston’s Law to China and the emerging markets is interesting.  Capital obviously doesn’t care about the politics of the people who run countries.  It will flee from a democracy to an authoritarian regime if the conditions there are better.  That seems to be the case in China right now.

But if the rulers of the authoritarian regime interfere with the free market, which is what’s happening in Russia at the moment, capital will fly away.

Capital likes different conditions for different purposes.  For example, in the 1960s a cheap yen attracted global capital to what was called the “yen carry trade.”  That meant that people borrowed Japanese yen at relatively low Japanese interest rates and used it to buy a currency that paid a higher rate.  Someone who borrowed yen at the effective rate of 0.0% in Japan, converted the money to U.S. dollars, bought U.S. Treasuries that paid 4.5% (back in the good old days) and leveraged the investment at 10:1, could achieve a 45% profit with relatively little risk.  Of course if the currencies shifted their relative valuations, the investor could also get a brick to the head.

Ironically, the U.S. dollar is now the low-priced currency being used for the carry trade.  How things change.

And capital always notices these changes.