29 May 2009

Global Integration of Financial Systems

Podcast based on May 2009 eJournal USA piece by Richard Vedder

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During the late 19th and early 20th centuries, there was little coordination of international finances. That changed substantially after World War II, and the change is continuing today. Indeed, the unprecedented integration of global financial markets may be a key factor in the current economic downturn, which is truly global in nature. In the May 2009 issue of eJournal USA, Richard Vedder, an author and a professor of economics at Ohio University, looks at the connections between political events, the global integration of financial systems and the current state of the economy.

World War II was the most costly conflict in history. Reconstruction of war-torn economies was the major concern for policymakers. But years of war had left the nations with little money with which to pay for goods and services. Policymakers, led by Britain’s John Maynard Keynes and Harry Dexter White of the United States, proposed a new international financial order at the Bretton Woods Conference in 1944. The International Monetary Fund, or IMF, was created to help nations with balance-of-payments problems and with difficulties maintaining financial reserves. Another institution, the World Bank, originally provided loans to finance reconstruction, then later moved to broader lending to finance new development projects. These financial institutions and other organizations, such as the United Nations and the Organization for Economic Cooperation and Development, laid the foundation for globalization.

Many events and trends have reinforced the growth of global finance. Following World War II, dozens of new nations emerged in Africa, Asia and other regions as nations released colonial possessions. Each new country had a new currency, and needed assistance from the IMF and World Bank to borrow money from other nations for development purposes. In the developed world, economic and financial integration was advanced. The European Union, or EU, is by far the most prominent example. Since 1958, the EU has grown from a six-nation customs union to an organization that includes 27 nations and a common currency — called the Euro — used in over half the area.

All of these factors played a part in the financial system that is now under a considerable amount of scrutiny. Newspaper headlines have asked if this is the end of capitalism as we know it. The evolving global financial system has been both a cause and a consequence of the rapid growth in globalization. The massive financial crises of the early 20th century played a role in causing political crises — most notably World War II. Since then, large-nation central bankers and finance ministers have met during times of economic turmoil to coordinate policies to ease panic, loosen credit and prevent the collapse of banks, insurance companies and other financial institutions. Institutions such as the IMF and World Bank also have played important roles to help developing nations deal with monetary losses in the current economic crisis. Officials recently voted to increase funding for the IMF, recognizing its continued and — some might say — increased importance today. Both have been critical players in financing long-term development needs and stabilizing shaky financial systems.

As international financial interaction grows, the need for coordination becomes greater than ever. To maintain financial stability, nations also must adhere to standards of behavior such as uniform accounting rules, international standards of conduct, and provisions for emergency loans. As the economic system develops, existing institutions will continue to evolve to function in the new international financial environment.

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