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In this chapter we survey the history of international finance spanning a century and a half. We start by characterizing capital flows in the long run, organizing our discussion around six facts relating to the volume and volatility of capital flows, measured in both net and gross terms. We then connect up the discussion with exchange rates and monetary policies. The organizing framework for this section is the macroeconomic trilemma. We describe where countries situated themselves relative to the trilemma over time and consider the political economy of their choices. Finally, we study the connections between international finance and economic and financial stability. We present consistent measures of growth and debt crises over the century and a half covered in this chapter and discuss how their incidence is related to those institutional and political circumstances, and, more generally, to the nature of the international monetary and financial regime.
Based on a thorough analysis of the BIS Annual Reports from the early 1970s to the late 2010s, this chapter traces the evolution of the BIS’s thinking on the international monetary and financial system. It demonstrates how – as a result of the growth of the Eurocurrency markets in the 1970s and of the sovereign debt crisis of the 1980s – the BIS’s traditional focus on exchange rates and their potential impact on monetary stability gradually shifted to global capital flows and to the risks posed by an increasingly complex and interconnected banking system. The 1995 Mexico crisis and 1997–8 Asian crisis reinforced this shift and led to an overriding concern with the procyclicality of the financial system as a potential threat to financial stability. While recognising that the focus of the BIS on a macro-financial stability framework has contributed a lot to advancing the work of the Basel-based committees and standard-setting bodies, the chapter also concludes that not much progress has been made in coordinating monetary policies or in addressing the fundamental problem of excessive elasticity of the financial system.
This article reconstructs the history of mutual assistance among Federal Reserve Banks. We present data on accommodation operations through which Reserve Banks mutualized gold reserves in emergency situations between 1913 and 1960. Reserve sharing was important in response to liquidity crises and bank runs. Such cooperation was essential for the cohesion of the U.S. monetary union. But fortunes could change, with emergency recipients of gold becoming providers. Because imbalances did not endlessly grow, instead narrowing when region-specific shocks subsided, mutual assistance created only limited tensions. These findings speak to the current debate over TARGET2 balances in Europe.
Becoming a professor was easier than becoming an economist. Growing up in Berkeley I was surrounded by professors; they dominated my parents’ dinner parties, though my mother and father themselves were not academics. The conversation touched on book projects, sabbatical plans, and foreign travel. There was the security of a regular paycheck but, so it seemed, no one resembling a boss.
Growing up in Berkeley had its distinctive aspects. An outing for the socially conscious among my high school classmates was going down to the university and getting tear-gassed. At about this time the high school curriculum compelled one to choose between the natural sciences, social sciences, and humanities tracks. Social sciences were irresistible for someone growing up in this political petri dish. The natural sciences track, in contrast, would have meant more math. Early decisions have long-term consequences.
The University of California, Santa Cruz, where I was an undergraduate, was another child of the 1960s. Intended as an alternative to factory schools like Berkeley, it had no grades, few major and breadth requirements, and little intellectual structure. Students were encouraged to design their own majors. This encouraged healthy disrespect for conventional academic boundaries, something that comes in handy for an economic historian. Santa Cruz also sent me for my junior year to the University of St. Andrews. St. Andrews students met periodically with a tutor to discuss assignments and read papers. My tutor was the Spanish economic historian Geoffrey Parker. In my senior year back at Santa Cruz, the department hired as a visitor a brilliant graduate student from Stanford, Flora Gill, to teach a course in economic history.
We examine the impact of the Great Depression on the share of votes for right-wing extremists in elections in the 1920s and 1930s. We confirm the existence of a link between political extremism and economic hard times as captured by growth or contraction of the economy. What mattered was not simply growth at the time of the election, but cumulative growth performance. The impact was greatest in countries with relatively short histories of democracy, with electoral systems that created low hurdles to parliamentary representation, and which had been on the losing side in World War I.
“The lessons of history” were widely invoked in 2008/09 as analysts and policymakers sought to make sense of the global financial crisis. Specifically, analogies with the early stages of the Great Depression of the 1930s were widely drawn. Building on work in cognitive science and literature on foreign policy making, this article seeks to account for the influence of this particular historical analogy and asks how it shaped both perceptions and the economic policy response. It asks how historical scholarship might be better organized to inform the process of economic policymaking. It concludes with some reflections on how research in economic history will be reshaped by the crisis.
The Great Depression was marked by a severe outbreak of protectionist trade policies. But contrary to the presumption that all countries scrambled to raise trade barriers, there was substantial cross-country variation in the movement to protectionism. Specifically, countries that remained on the gold standard resorted to tariffs, import quotas, and exchange controls to a greater extent than countries that went off gold. Just as the gold standard constraint on monetary policy is critical to understanding macroeconomic developments in this period, exchange rate policies help explain changes in trade policy.
An important part of western Europe's post-Second World War success story was its rapid integration into the world economy as well as its rapid integration with itself. The Great Depression, protectionism, and the war had reduced foreign trade to the levels recorded just before the First World War. In 1947–8, for instance, the volume of western European exports was barely above what it had been in 1913 (Svennilson 1954). As for capital movements, they had virtually come to a standstill, in a world riddled with inconvertible currencies and rigid controls on foreign exchange flows. Sixty years later, the volume of exports had been multiplied by fifty, free trade prevailed in both western and eastern Europe, and the degree of openness had reached unprecedented levels, as had the extent of intra-European trade, while capital movements were almost completely free. Indeed, a significant number of countries had gone as far as doing away with their domestic monies in favor of a new common currency – the euro.
The rising importance of foreign trade over the period is documented in Figure 11.1, which shows the share of exports in GDP for western Europe in constant prices. The series, after dipping in the interwar years, rises very sharply after 1950 to levels that by 1973 had already overtaken those achieved during the last phase of globalization at the beginning of the twentieth century. The rise in the trade share is even more spectacular in the last few decades.