Does Integration Globalize? Financial Crises and Financial Geography 1831–1914

Abstract

The current trend towards international fmancial integration is commonly described as “globalization”. A recent book has made of “globalizing capital” the driving force shaping the changing fortunes of international monetary relations.’ But one may wonder what kind of geography does globalization imply? Does it give rise to a tabula rasa of horizontal “market” relations, as assumed by neoclassical economists? Does it instead produce vertical power relations between lenders and borrowers as hypothesized by an old Marxist tradition dating back to Rudolf Hilferding? This short paper is an attempt at looking at the experience of the XIXth century to shed some light on this issue. We claim that during this period, technological change and the growth of international banking reduced the transaction costs of arbitrage between fmancial markets, thus contributing to bring the world fmancial system closer together, along both horizontal and hierarchical lines. On the other hand, we argue that this tendency towards “globalization” in turn exacerbated problems of contagion, thus placing monetary authorities in front of a difficult trade-off between domestic and external equilibrium. The dilemma was partly mitigated by the development of central banks as ways to deal with fmancial crises. But because central banks were being organized on a national basis, fmancial segmentation proceeded, with monetary authorities attempting to provide a measure of insulation of domestic markets through either economic or more political means. With its superficial appearance of a largely globalized regime, the pre-1914 international banking system in fact concealed a complex political construct.