Financial Globalization and Crises: Overview

Financial globalization, the integration of countries with the global financial system, has increased substantially since the 1970s and particularly with more force since the 1990s. In fact, the gold standard period of 1880-1914 saw a major wave of financial globalization, as cross-border capital flows surged, incorporating countries in the center and the periphery at that time into a worldwide network of finance and investment. With the advent of World War I, global growth halted and international financial integration was disrupted as barriers were erected, with minimal capital movements between 1914 and 1945. Although domestic financial markets remained heavily regulated and control were typically imposed on capital flows, a slow reconstruction of the world financial system took place during the Bretton Woods era of 1945-71. It was not until the late 1970s, however, that the world witnessed the beginning of a new wave of international financial integration, reflecting the dismantling of capital controls, the deregulation of domestic financial systems, and a technological revolution, not just in information and telecommunications, but also in financial product engineering. Newly emerging markets joined this wave of financial globalization with vigor starting in the latter part of the 1980s and mostly in the 1990s.