Global financial system

"Global finance" redirects here. For magazine, see Global Finance (magazine).
Chart of the world's gross domestic product over the last two millennia

The global financial system is the worldwide framework of legal agreements, institutions, and both formal and informal economic action that together facilitate international flows of financial capital for purposes of investment and trade financing. Since emerging in the late 19th century during the first modern wave of economic globalization, its evolution is marked by the establishment of central banks, multilateral treaties, and intergovernmental organizations aimed at improving the transparency, regulation, and effectiveness of international markets.[1][2]: 74 [3]: 1  In the late 1800s, world migration and communication technology facilitated unprecedented growth in international trade and investment. At the onset of World War I, trade contracted as foreign exchange markets became paralyzed by money market illiquidity. Countries sought to defend against external shocks with protectionist policies and trade virtually halted by 1933, worsening the effects of the global Great Depression until a series of reciprocal trade agreements slowly reduced tariffs worldwide. Efforts to revamp the international monetary system after World War II improved exchange rate stability, fostering record growth in global finance.[citation needed]

A series of currency devaluations and oil crises in the 1970s led most countries to float their currencies. The world economy became increasingly financially integrated in the 1980s and 1990s due to capital account liberalization and financial deregulation. A series of financial crises in Europe, Asia, and Latin America followed with contagious effects due to greater exposure to volatile capital flows. The 2007–2008 financial crisis, which originated in the United States, quickly propagated among other nations and is recognized as the catalyst for the worldwide Great Recession. A market adjustment to Greece's noncompliance with its monetary union in 2009 ignited a sovereign debt crisis among European nations known as the Eurozone crisis. The history of international finance shows a U-shaped pattern in international capital flows: high prior to 1914 and after 1989, but lower in between.[4] The volatility of capital flows has been greater since the 1970s than in previous periods.[4]

A country's decision to operate an open economy and globalize its financial capital carries monetary implications captured by the balance of payments. It also renders exposure to risks in international finance, such as political deterioration, regulatory changes, foreign exchange controls, and legal uncertainties for property rights and investments. Both individuals and groups may participate in the global financial system. Consumers and international businesses undertake consumption, production, and investment. Governments and intergovernmental bodies act as purveyors of international trade, economic development, and crisis management. Regulatory bodies establish financial regulations and legal procedures, while independent bodies facilitate industry supervision. Research institutes and other associations analyze data, publish reports and policy briefs, and host public discourse on global financial affairs.[citation needed]

While the global financial system is edging toward greater stability, governments must deal with differing regional or national needs. Some nations are trying to systematically discontinue unconventional monetary policies installed to cultivate recovery, while others are expanding their scope and scale. Emerging market policymakers face a challenge of precision as they must carefully institute sustainable macroeconomic policies during extraordinary market sensitivity without provoking investors to retreat their capital to stronger markets. Nations' inability to align interests and achieve international consensus on matters such as banking regulation has perpetuated the risk of future global financial catastrophes. Initiatives like the United Nations Sustainable Development Goal 10 are aimed at improving regulation and monitoring of global financial systems.[5]

  1. ^ James, Paul W.; Patomäki, Heikki (2007). Globalization and Economy, Vol. 2: Globalizing Finance and the New Economy. London, UK: Sage Publications. ISBN 978-1-4129-1952-4.
  2. ^ Cassis, Youssef (2006). Capitals of Capital: A History of International Financial Centres, 1780–2005. Cambridge, UK: Cambridge University Press. ISBN 978-0-511-33522-8.
  3. ^ Flandreau, Marc; Holtfrerich, Carl-Ludwig; James, Harold (2003). International Financial History in the Twentieth Century: System and Anarchy. Cambridge, UK: Cambridge University Press. ISBN 978-0-511-07011-2.
  4. ^ a b Eichengreen, Barry; Esteves, Rui Pedro (2021), Fukao, Kyoji; Broadberry, Stephen (eds.), "International Finance", The Cambridge Economic History of the Modern World: Volume 2: 1870 to the Present, vol. 2, Cambridge University Press, pp. 501–525, ISBN 978-1-107-15948-8
  5. ^ "Goal 10 targets". UNDP. Archived from the original on 2020-11-27. Retrieved 2020-09-23.