International capital movements and the global order

What is the relationship between the phenomenon of globalization and the free movement of capital? Is the world held together by capital flows, or do they produce such instability as to generate backlashes against global interconnectedness? Economists are divided on these questions. Whereas there is a broad agreement among economists about the beneficial consequences of trade flows, some of the most prominent and articulate voices in defense of free trade, Jagdhish Bhagwati and Joseph Stiglitz, have also been among the skeptics on capital liberalization (Bhagwati 2004). Capital flows, in the view of Stiglitz, generate such large waves as to upset the delicate rowing boats of small countries afloat on the sea of globalization (Stiglitz 1998). In order to answer these questions, this paper distinguishes the varieties of cross-border capital movements in the two modern eras or waves of globalization, from the mid-nineteenth century to World War I, and then again from the 1970s to 2007, as well as the capital market and financial developments that contributed to the catastrophic unraveling of globalization in the intervening period. The core of the paper is thus a chronology of the succession of phases: first, substantial and increasing movements – largely through the expansion of the bond market – in the interconnected global economy of the late nineteenth century (the era often characterized by its monetary arrangement: the gold standard); second, an attempt to revive the flows of the gold standard era but one which was more and more dominated by volatile hot money flows (the interwar era); third, a period in which there was relatively little (and relatively state-controlled or state-directed) international capital movement (again, usually named after its monetary arrangement, the Bretton Woods era); and fourth and finally, a loosening of controls and a return to substantial international capital mobility, without much of a formal monetary system or mechanism, the era in which the term “globalization” in its modern meaning was coined (modern globalization).