Essay title - What has been the social impact and character of the globalisation of finance?
The development of new financial instruments, the deregulation of national financial markets and the growth of international banks and other financial institutions have created a functioning global financial system. This direct quote by David Held in Global Transformations introduces how recent changes in the financial market have led to a more efficient world-wide trading in currencies and bonds. 'Cross-border financial flows' have occurred for centuries and can be traced back to the late nineteenth century during the era of the Classical Gold Standard. In order to fully understand the advanced and intricate character of global financial markets, one must analyse the 'financial openness, financial enmeshment and financial integration' of it. The openness of the financial markets refers to the amount of legal restrictions on its international transactions. The level of enmeshment refers to the degree of national financial dealings in the global financial activity. Financial integration is the equalization of the prices and returns of identical assets between different financial markets. These instruments are used to examine extensity and intensity of financial globalisation. The former relates to the 'geographical reach' of the world financial markets. The latter involves the 'magnitude of global financial flows'.
Global financial activities have been extremely evolutionary and have changed together with advancement in communication technologies. To identify contemporary financial globalization, historical periods such as the early modern, classical Gold Standard, Bretton Woods has to be discussed. These historical backgrounds will also help highlight attributes of contemporary financial globalization and its social impact.
The earliest form of transnational financial dealing was done with internationally accepted form of currency such as gold and silver. In the fourteenth century, the famous Peruzzi Company form ties with foreign banks and engaged in 'foreign' operations. From the 16th century, Europe received large amounts of precious metals as part of their financial trade. This resulted in interrelations of both nations currency. The growth of cross border monetary flows was encouraged by two main factors. Firstly, increase in volume of global trading raised demands for international finance in order to provide more efficient and secure services. Secondly, 'absolutist states' asserted pressure for better financial services as they increased funding for government spending especially in national defence during the war periods. An example is the Bank of England was founded in their war with France. During these periods, cross border finance was relatively extensive but was restricted by imperial system with poor technologies. This era of globalized finance experienced increased increasing cross border finance which highlights the financial intensity which can be explained by the significance placed on 'war-making and state-building'.
The Classical Gold Standard period saw the emergence of London as a primary force in the international finance system as a result of the Industrial Revolution. This period is often considered where a 'truly global financial system existed'. The Industrial Revolution in Britain also helped local banks expand their global activity. Global finance was relatively more far reaching in the world markets and global cash flows grew during the Gold Standard period. The global reach of this era saw Western banks opened as far as China, whilst the increased number of overseas brunches from 700 in 1890 to 1,400 branches in 914 accommodated the rising demand for international finance services. Government had little authority as financial markets grew simultaneously with the development in communications since there are only few legal restrictions. Barker (1915) described the Gold Standard period as 'a single system of credit for the entire world' as improved communications such as the telegraph helped ease international transaction operations.
The Gold Standard period is also claimed to have the greatest scale of net flows crossing the globe. Foreign investments made up a noticeable proportion of total national investment. In 1914, America had 43.6 percent of global total of foreign investment stocks, while Europe had 24.4 percent. This period saw tremendous development in the global bond market as governments had little restrictions on trading. However government also hardly intervened to provide support when borrowing countries were late to pay their loans. Successful banks benefited from this period while others such as the Barings Bank were not rescued and went bankrupt.
The analysis of the operation of the classical Gold Standard is vital towards the understanding of global finance's social impact. The system required a fixed exchange rate which meant that country members fixed values of currencies to the price of gold. Countries within the system was also required to 'convert their currency into gold on demand and did not restrict international gold flows'. In order to ensure compatibility with the Gold Standard when automatic adjustments failed, national financial authorities had to adjust their domestic policies such as the interest rate. The system saw two outcomes; some countries experienced a surplus balance of payments while others had a balance of payments deficit. The countries that had a balance of payment surplus invested heavily in developing countries covering their deficits. The countries covered their deficit in the short term by imposing higher interest rates. As a result of higher interest rates, money would be invested in the country to achieve higher returns. Higher interest rates would decrease demand in the nation as well as import levels. The social impact would be a fall in the output and employment levels due to the decreased demand in the nation.
The collapse of the classical Gold Standard system finally came during the First World War. The War brought instability, the hyperinflation of the German economy being the most influential, prevented the stable come-back of the system. Several big nations such as the US and Britain tried returning to the Gold Standard system in 1925, but success did not last long as the Great Depression disintegrated the system. In the early interwar years, capital flows increased but were not as intensive as they were more 'geographically concentrated'. Post Great-War Britain remained the largest international institution but only managed to export half the amount pre-war Britain was exporting. The intensity and extensity of capital flows declined tremendously during the interwar period. In the 1930's, the world economy had undergone many structural changes that made the Gold Standard system completely unfeasible.
As the Gold Standard system is dysfunctional, 'a new international capital recycling mechanism had to be constructed'. The period when public authorities
