The Globalization of International Financial Markets:
What Can History Teach Us?*

Michael D. Bordo
Rutgers University and NBER

Paper prepared for the conference “International Financial Markets: The Challenge of
Globalization.”

March 31, 2000. Texas A and M University, College Station Texas.

* For valuable research assistance, I thank Antu Murshid.

1.

Introduction
Globalization has become the buzz word of the new millennium. It is viewed as the

cause of many of the world’s problems as well as a panacea. The debate over globalization is manifest both in public demonstrations against the WTO in Seattle in the Fall of 1999 and the
IMF and World Bank earlier. It also has led to a spate of scholarly and not so scholarly books on the subject.1
Until three years ago the consensus view among economists on the issue of the international integration of financial markets was very positive. The benefits of open capital markets stressed include: optimal international resource allocation; intertemporal optimization; international portfolio diversification and discipline on policy makers.2. However, the recent spate of crises in Latin America and Asia has led some to argue that the costs of complete liberalization of financial markets for emerging countries may outweigh the benefits.3
The paper focuses on the globalization of financial markets from the historical perspective of the past 120 years. In Section 2, I summarize the empirical evidence on the international integration of financial markets from 1880 to the present primarily based on my research with Barry Eichengreen and that of Maurice Obstfeld and Alan Taylor. This research shows that globalization has followed a U-shaped pattern for both stocks and net flows of foreign investment relative to GDP over the period 1880 to 1998. The ratios of both the stocks and net flows of foreign investment relative to GDP in the