How finance globalized: A tail of two cities

Policy Study

This paper argues that the unique historical and economic circumstances of the United Kingdom and of the United States underlie the development of global finance as we have it today. These circumstances, rather than primitives such as technological change or the information revolution, explain the current shape of globalized financial institutions and practices. The apparent technological necessity of a super-leveraged, risk-shifting global financial complex is a mirage; this complex, anchored in the cities of London and New York, has emerged due to unique circumstances, most notably, these cities’ host nations’ sponsorship of gold-based global currency systems, and more recently the 30-years’-long current-account deficit/capital-account surplus that has made the US a global liquidity sink. The chapter presents some empirical evidence suggesting that this turn toward globalized finance has been associated with reduced development-finance capability, in these two nations.

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